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Mexican Peso Outlook: USD/MXN Wilts as Traders Await Mexico Inflation Data

Mexican Peso Outlook: USD/MXN Wilts as Traders Await Mexico Inflation Data

Diego Colman, Strategist


  • USD/MXN ends this week’s winning streak and pivots lower
  • Mexican peso gains, however, are capped by a large drop in oil prices and fragile market sentiment
  • On Thursday, traders will closely watch inflation data coming from Mexico. A rise in consumer prices may cement expectations for a September rate hike by Banxico

Most read: Oil Prices Catch Resistance Near Six-Year-Highs

The Mexican Peso seems to be taking a breather on Wednesday despite the somewhat defensive market tone and another big drop in oil prices. In this context, the USD/MXN trades modestly lower, sliding 0.2% to 19.98 after failing the piece the 20.00/20.20 technical resistance decisively.

With fragile investor sentiment and a large oil correction in the backdrop, the Mexican peso, or crude-linked currencies for that matter, will struggle to gain much traction against the U.S. dollar. However, if the situation were to resolve itself in the coming days, and both risk-appetite and oil prices bounce back, MXN could stand to benefit, supported primarily by its rising carry.

Banxico started raising borrowing costs last month to contain mounting inflationary pressures and ensure inflation converges to the target over the forecast horizon. That decision and the hawkish shift by the central bank, which took Wall Street totally by surprise, have led investors to price the beginning of a tightening cycle, with three additional rate hikes anticipated this year. Monetary policy divergence between Banxico and the Fed can become a positive catalyst for the Latin America currency, but volatility would need to stay subdued for the search-for-yield trade to work efficiently during the summer months.

Turning our eyes to the Mexican economy, June inflation data will be released on Thursday morning. Traders expect the headline consumer price index to ease slightly to 5.87% y/y from 5.89% y/y in May. If CPI fails to cool or accelerates further, expectations for a September rate increase could become more entrenched, fueling USD/MXN weakness in the near term.

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USD/MXN appears to have stalled around its 200-day simple moving average near the 20.00/ 20.20 mark and has now started falling. If sellers manage to push prices lower in the next couple of trading sessions, USD/MXN could head towards the 19.80 region. Should this support be taken out, the 2021 low near 19.55 will come into play, followed by the 19.00 psychological level.

On the contrary, if bulls regain control and we see a move above the 20.00/20.20 resistance, buying pressure could gain momentum, propelling the exchange rate towards the 20.75 level, where the June high converges with a 12-month descending trendline.


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---Written by Diego Colman, DailyFX Market Strategist

Follow me on Twitter: @DColmanFX

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