- The USD rally loses steam as risk aversion ebbs.
- Hopes of a dovish turn by the Federal Reserve are adding negative pressure to the Dollar
- USD/MXN bullish trend remains intact, with downside attempts held above 18.60.
The US Dollar is practically flat on the daily chart, consolidating gains following a five-day rally. Bulls met resistance at the 18.75 area on Monday and the pair has remained trading sideways on Tuesday, with downside attempts limited above 18.60 so far.
A somewhat brighter market sentiment is weighing on the safe-haven US Dollar and hopes of some dovish hint after the Fed meeting are adding pressure on the USD.
Recent US Data has fuelled hopes of a September cut
The US labour market is showing signs of exhaustion, unemployment increased in June, and inflation is finally drawing close to the 2% level. Data released last week revealed that the PCE Prices Index remained at unchanged at a 2.5% yearly rate in June.
These figures have boosted expectations that the Bank might start cutting rates in September, instead of December as previous Fed projections suggested.
In this context, Wednesday’s Fed monetary policy decision will be closely watched. The bank will highly likely leave rates unchanged, but any signal towards earlier rate cuts is likely to weigh on the USD.
USD/MXN consolidates with the bullish trend intact
From a technical perspective, the pair is consolidating gains ahead of the meeting. The broader bias remains bullish, with resistances at 18.80 and 19.00. Supports are 18.60 and 18.30.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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