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USD/MXN Crawls Higher Ahead of U.S. CPI Data & Banxico’s Rate Decision

USD/MXN Crawls Higher Ahead of U.S. CPI Data & Banxico’s Rate Decision

Diego Colman, Strategist


  • USD/MXN has started to gain some ground in the last few days after stopping and reversing higher at a key support area near 19.80
  • U.S. dollar momentum can pick up pace in the coming days if inflation data in the United States fails to cool down or rise further
  • In this article we present the most important technical levels for USD/MXN near term

Most read: US Dollar Rallies to Resistance, Inflation Set to Spark Volatility

After bouncing off the 19.80 support zone earlier in the month, USD/MXN has started to gain ground in recent days. This move has been partially aided by widespread strength in the DXY Index, which began on Friday after strong US payrolls data led skeptical traders to speculate that the Fed may announce an exit strategy from its quantitative easing program sooner than expected, perhaps even in September (as a reminder, the US economy added 943,000 jobs in July, well above the consensus of an 870,000 increase).

Tapering speculation could intensify in the coming sessions if US inflation figures fail to cool significantly or even accelerate from current levels. That said, we will get a better picture of the inflationary trend on Wednesday when the Bureau of Labor Statistics releases new data. In terms of market predictions, July headline CPI is seen slowing slightly to 5.3% y/y from 5.4% y/y, while the core index is forecast to decline to 4.3% y/y from 4.5% y/y. Traders should be on the lookout for any upside surprises, as such a result could lift Treasury yields, strengthen the case for monetary tightening and trigger a sharp rise in the dollar.

Later in the week, we have another event that may spark volatility in USD/MXN: Banxico’s rate decision scheduled for Thursday. Investors expect the central bank to raise borrowing costs by 25 basis points to 4.50%, its highest level in a year. As this adjustment is fully priced in, the market will concentrate on forward guidance to see if there are more hikes around the corner to slow the rise in consumer prices. Any hawkish language will be bullish for the Mexican peso in the medium term, but not in the immediate future as taper bets in the US will be the focus of currency traders.

From a technical point of view, if bulls manage push USDMXN higher, an important resistance appears in the 20.20/20.25 area. To reassert bullish momentum, buyers would need propel the pair above this ceiling decisively. If scenario materializes, USD/MXN could head towards the June high at 20.75. Alternatively, if bears regain control of the market and drive price lower, the first technical floor comes at 19.80. If price breaks this critical support, there is scope for a move towards the June low near 19.60.

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---Written by Diego Colman, DailyFX Market Strategist

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