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Mexican Peso Forecast: USD/MXN Jumps on Sizzling U.S. Inflation. Will Traders Fade this Move?

Mexican Peso Forecast: USD/MXN Jumps on Sizzling U.S. Inflation. Will Traders Fade this Move?

Diego Colman, Strategist


  • Red-hot inflation in the US boosts the dollar across the board, with USD/MXN climbing more than 1% towards the 20.06 mark
  • Mexican peso's weakness, however, may be short-lived if the Fed sticks to the script and reiterates that the rise in consumer prices is transitory
  • In this article we present key technical levels for the USD/MXN pair

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The U.S. dollar, measured by the DXY Index, surged on Tuesday propelled by mounting inflationary pressures in the United States. Data earlier today surprised on the upside and showed that June Headline CPI rose 5.4% y/y, its highest level since 2008. Meanwhile, core inflation, which excludes food and energy items, climbed 4.5% y/y, the largest advance since November 1991. The sizzling figures pushed the 2-year treasury yield up to 0.267% from 0.230%, as traders bet that the Federal Reserve will be compelled to withdraw stimulus faster than expected. As an example, following the release of the CPI report, the probabilitly of a 25 bp rate increase at the June 2022 FOMC meeting moved up to 30% from 24.4% the day earlier.

Rising short-term Treasury yields on expectations of interest rate increases spooked investors and triggered moderate losses in the EMFX space. In this context, the Mexican peso depreciated more than 1% throughout the day, with USD/MXN climbing from 19.88 to 20.06. This move, however, cannot be entirely attributed to the latest developments in the macro front in the United States. Mexico’s government interference in the energy sector and AMLO’s promise to reform the electricity market at the constitutional level appeared to have exacerbated MXN’s weakness.

In any case, turning our attention to U.S. inflation dynamics again, supply bottlenecks and rising costs associated with the reopening of the economy were the main drivers of the outsize rise in consumer prices last month (e.g. used vehicles accounted for one-third of the increase in CPI). This may give the Fed enough cover stick to the transitory inflation thesis, ensuring that monetary tightening expectations do not get out of hand. Under this assumption, when the dust settles and market noise recedes, nominal yields should stay in check for the most part, preventing strong DXY appreciation. This scenario is likely to benefit the Mexican peso due to its carry advantage reinforced by Banxico's current tightening cycle. That said, it would not surprise to see dollar bears fade the recent spike in USD/MXN.

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From a technical point of view, despite the spike on Tuesday, USD/MXN appears to be in a consolidation phase, trapped between resistance (20.20) and support (19.80). For price to gain a distinctive short-term directional bias, the pair would have to move decisively beyond either of those levels. Having said that, if resistance is pierced, USD/MXN could drift towards the 20.75 zone, where the June high converges with a long-term descending trendline in play since June last year. Alternatively, if the exchange rate drops below 19.80, sellers could take control of the market and drive price towards the 2021 low in the 19.55 area. Last but not least, if this support fails to hold, the 19.00 psychological mark would become the next downside level of interest.

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---Written by Diego Colman, DailyFX Market Strategist

Follow me on Twitter: @DColmanFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.