Mexican Peso Outlook: U.S. Inflation Data Could Lift Yields & the USD/MXN

MEXICAN PESO KEY POINTS:

• USD/MXN continues to edge higher, although at a very slow pace
• The rebound in U.S. treasury yields have created a more constructive outlook for the dollar in the near term
• On Wednesday, traders will closely watch consumer price data in the United States. If inflation rises more than expected, yields could continue to climb, weighing on the Mexican peso short-term

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

USD/MXN has continued to trend higher this week after bouncing off support near 19.80 at the start of the month. During this period, a key catalyst for U.S. dollar's strength has been the rebound in treasury yields. For example, in the last six days, the US 10-year rate has climbed from a low of 1.12% to a high of 1.34% today, a 22 bps increase in such a short period of time.

Treasury yields can climb further and weigh on EMFX in the coming days if inflationary pressures fail to slow down in the United States. Traders should get a better picture of the trend in consumer prices on Wednesday when the Bureau of Labor Statistics releases its latest inflation report.

In terms of forecasts, July headline CPI is expected to retreat to 5.3% y-o-y from 5.4% y-o-y in June, while the core indicator is seen cooling to 4.3% y-o-y from 4.5% y-o-y in the previous month. If data ends up surprising to the upside, long term yields could gain ground as the market brings forward Fed tightening expectations (tapering) at a time of strengthening labor market. This scenario could lift the greenback across the board, propelling USD/MXN higher in the very near term.

Next up for traders and another potential source of volatility for USD/MXN will be Banxico’s interest rate decision on Thursday. The central bank is seen raising borrowing costs by 25 bps to 4.50%, following a hike of the same magnitude at the June meeting. As the move is fully embedded in the curve, traders will pay more attention to forward-guidance to see if policymakers plan to keep tightening monetary policy in an effort to head off inflation. That said, any hawkish message will likely be positive for the Mexican peso in the medium term. Over a shorter-term horizon, however, yield dynamics in the United States will guide price action and have a stronger impact on emerging market currencies

USD/MXN TECHNICAL ANALYSIS

From a technical perspective, if USD/MXN continues to march higher, the first resistance to consider appears in the 20.20/20.25 region. To build on momentum, buyers would need to push price above this barrier decisively. If that occurs, the pair could be on its way to reconquer the June high at 20.75. On the flip side, if bears regain control of the market and drive USD/MXN lower, a key support comes at 19.80. If price breaks this floor, there is scope for a move towards the June low near 19.60.

USD/MXN TECHCNICAL CHART

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---Written by Diego Colman, DailyFX Market Strategist