USD/MXN Points Lower As Bank of Mexico Raises Overnight Rate by 0.50%

Bank of Mexico, US Dollar, Mexican Peso, USD/MXN, Federal Reserve – Talking Points

• Bank of Mexico raises rates by 50 basis points
• USD/MXN relatively unchanged on Banxico rate hike
• Inflation continues to plague emerging markets

The Bank of Mexico elected to raise the country’s benchmark interest rate by 50 basis points on Thursday, bringing the overnight rate to 6%. The rate hike was in line with street expectations, as the country battles rampant inflation. 4 board members voted to hike to 6%, with just one member voting for a 25 basis point hike to 5.75%.

The Bank stated that inflationary pressures continue to run hot and last longer than originally anticipated. Forecasts for headline and core inflation saw upward revisions, with policymakers highlighting that the balance of risks related to inflation remains skewed to the upside. Mexico, like its emerging markets counterparts, continues to suffer from supply chain inefficiencies, with inflation in January rising 7.07% YoY and 0.59% month-over-month.

USD/MXN Daily Chart

Chart created with TradingView

Despite the rate hike, USD/MXN was relatively unchanged on the rate decision. The pair saw more volatility around Thursday’s US CPI release, which saw USD/MXN spike lower toward the 200-day moving average (MA) before recovering. Upside potential remains capped by a descending trendline that has kept price in check since mid-January. Price remains to be supported by the 200-day MA, and could look to retest overhead resistance as we creep closer toward that pivotal March Fed meeting.

Given the lack of movement following Banxico’s decision, market participants may be solely focusing on the USD side of the equation ahead of the March policy meeting. Thursday’s hot CPI print in the US saw expectations of a 50 basis point hike by the Fed skyrocket. Should the Fed raise rates by 0.50%, it would constitute the first move of such size since 2000.

Of note, James Bullard of the St. Louis Fed said in comments Thursday afternoon that the Fed should look into rate hikes in between policy meetings. The comments took the markets by surprise, with USD getting bid and US equities paring gains from the morning session. It would seem that the table is being set for a stronger USD over the next few months, which could see USD/MXN break out of its multi-week downtrend.

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--- Written by Brendan Fagan, Intern

To contact Brendan, use the comments section below or @BrendanFaganFX on Twitter