US Dollar Outlook: USD/MXN Volatility to Rise as Banxico Looms

USD/MXN PRICE OUTLOOK: US DOLLAR DUE FOR WEAKNESS, MEXICAN PESO EYES BANXICO RATE DECISION

• US Dollar weakness subsided on Wednesday alongside a pullback in major stock indices
• DXY Index erased intraday losses as bulls defended the 50-day simple moving average
• USD/MXN volatility looks likely to accelerate in light of the Banxico rate decision due
• Learn more about the basics of technical analysis or implied volatility trading strategies

The US Dollar traded largely mixed on Wednesday. US Dollar bears made another push early in the session, but as equities started to stumble lower and risk appetite deteriorated, selling pressure subsided across USD price action. This helped the DXY Index recoil slightly higher off two-week lows and maintain a key technical support level underpinned by its 50-day simple moving average. GBP/USD eked out a modest 15-pip gain while AUD/USD dropped 16-pips on balance.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (12 OCT 2020 TO 10 FEB 2021)

Chart by @RichDvorakFX created using TradingView

US Dollar weakness could linger more broadly, however, in light of recent technical and fundamental developments. Along with a breakdown of the relative strength index, US Dollar downside notched over the last few trading sessions appears to have invalidated the short-term bullish trendline formed by the 06 January and 26 January swing lows.

During his speech at the Economics Club of New York today, Federal Reserve Chair Jerome Powell also reassured markets that FOMC policy will stay uber-accommodative and look through transient rises in inflation. This likely stands to keep the reflation trade alive and US Dollar under pressure.

USD PRICE OUTLOOK – US DOLLAR IMPLIED VOLATILITY TRADING RANGES (OVERNIGHT)

US Dollar overnight implied volatility readings bring USD/MXN price action into focus for Thursday’s trading session. USD/MXN overnight implied volatility of 15.6% is the highest reading relative to other top FX peers. This is likely owing to the Banxico interest rate decision scheduled for release at 19:00 GMT. Market consensus is for the central bank of Mexico to cut rates by 25-basis points, but there remains potential for a hawkish hold considering swaps are pricing the odds of a rate cut at about 50%.

Even if Banxico does in fact lower its policy interest rate target to 4.00% from the current 4.25% level, less-dovish forward guidance, perhaps following hotter-than-expected inflation data, could see the Mexican Peso strengthen. On the other hand, in the event of USD/MXN buying pressure materializes, traders might consider fading the move as bearish USD/MXN poses a top trading opportunity for 2021.

-- Written by Rich Dvorak, Analyst for DailyFX.com

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