USD/MXN bounces off yearly lows, despite US Dollar weakness

USD/MXN found bids around the year-to-date (YTD) low area and climbed to fresh two-day highs before reversing its path as the US Dollar (USD) weakened. Nevertheless, the USD/MXN is still registering minimal gains of 0.15%, trading at around 17.1320, after reaching a YTD low of 17.0783.

Surprise expansion in US Retail Sales meets Skepticism over Fed’s rate hike expectations

The Mexican Peso (MXN) weakened amidst a risk-on impulse, as shown by Wall Street trading with gains. Market participants were surprised by the US Federal Reserve’s (Fed) hawkish dot plots, with 12 of 18 officials lifting their dots past the 5.50% threshold and revising Fed Funds peak rates upward. Although it briefly extended the US Dollar recovery, Jerome Powell’s press conference stabilized things sending the greenback lower.

Data-wise, the US economic docket revealed a surprising expansion in Retail Sales, topping expectations, increasing 0.3% MoM in May, above estimates of a 0.1% contraction. At the same time, the US Department of Labor updated unemployment claims data for the June 10 week, growing above estimates of 249K, at 262K, the same as the prior’s week upward revised figures.

Recently revealed data, Industrial Production contracted in May -0.2% MoM, missed the forecast of 0.1% growth, while the New York and Philadelphia Fed Manufacturing Indices came mixed, with the NY rebounding unexpectedly after May’s plunge, while the Philly further deteriorated but at a slower pace.

Reacting to the data, US Treasury bond yields tumbled,  a headwind for the buck. The US Dollar Index (DXY), which tracks the greenback’s value against a basket of six rivals, drops 0.77%, down at 102.209 after hitting a one-month low.

Regarding upcoming monetary policy meetings, the CME FedWatch Tool shows odds for a 25 bps rate hike in July stand at 67%. Notably, traders contradict Fed Chair Powell’s words regarding two more rate hikes, as the swaps market expects no further increases. Investors speculate the Fed would slash rates as early as January 2024, expecting six rate cuts towards December 2024, with the Federal Funds Rate (FFR) seen at 3.50%-3.75%.

Upcoming events

The US agenda will feature Fed speakers, the US Consumer Sentiment from the University of Michigan (UoM), and American inflation expectations. On the Mexican front, next week’s Retail Sales and Bank of Mexico (Banxico) monetary policy decision are eyed by USD/MXN traders.

USD/MXN Price Analysis: Technical outlook

Despite slashing some of its losses, the USD/MXN remains downward biased as it remains below the May 16 low of 17.4038 turned resistance, seen as an inflection pivot that could shift the USD/MXN bias to neutral. That would put into play the 17.40-17.7720 area, surrounded by the 20 and 50-day Exponential Moving Averages (EMAs) at 17.4443 and 17.7238, respectively. Once those levels are cleared, USD/MXN buyers could remain hopeful the pair would challenge the 18.00 psychological level in the medium term. Otherwise, the path of least resistance is downwards, with the 17.0000 figure up next, followed by 16.50, before diving toward October 2015 low of 16.3257.