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Mexican Peso Weekly Forecast: USD/MXN Drops as Markets Price in Rate Cut Despite Banxico Dismissal of Inflation

Mexican Peso Weekly Forecast: USD/MXN Drops as Markets Price in Rate Cut Despite Banxico Dismissal of Inflation

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USD/MXN Forecast: Bearish


USD/MXN once again started the week with a bullish bias as the US Dollar pick up buying momentum as inflation fears caused bond yields to rise towards the upper bounds of their post-pandemic range. Stronger than expected CPI data was enough to prompt investors to seek refuge from inflationary pressures, causing USD/MXN to bounce back towards its 76.4% Fibonacci at 20.18.

But the pair quickly reversed lower as equities were able to recover positive momentum in the afternoon, dragging the US Dollar lower. Then came the Banxico interest rate decision meeting, where rates were left unchanged at 4% as the Central Bank bets on the recent inflation spike being temporary. In all honesty, I was expecting the wording to be more hawkish, pointing towards a gradual unwind of pandemic-induced quantitative easing, but the traders seemed to think that avoiding a rate cut was enough for now.

USD/MXN dropped to 19.91 after the meeting concluded, just shy of its strong support at 19.87, but the pair continued to drop into Friday’s session, falling below 19.78 for the first time since January. This is likely because Banxico was able to strike a balance between growing inflation expectations and trying to achieve a strong economic recovery, despite downplaying the risks of persistent inflation.

From Thursday’s statement it is likely that see monetary policy unchanged in the immediate future, although money markets are starting to price a 50% chance of one 25 bps hike in the next six months, which would put the Mexican Peso back in the spotlight of those looking for a carry trade return.

USD/MXN Levels

USD/MXN sellers have managed to break some strong support areas this past week, but the move lower seems to be slightly exhausted in the short term. After dropping below 19.80, the next point of reference is 19.68, an area where bearish momentum was halted back in December 2020. I wouldn’t be surprised if the pair drifts higher towards the 20 pesos mark to start the week as it usually corrects after a large drop to end the week, but the long-term forecast continues to be bearish.

USD/MXN 4-hour chart

Fibonacci Confluence on FX Pairs

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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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