• USD/MXN drops to seven-year low, extending losses for fourth straight week.
  • The Federal Reserve’s decision to keep rates unchanged weakens the US dollar, fueling further USD/MXN losses.
  • Hawkish remarks by Fed policymakers suggest further tightening if inflation does not slow.
  • Comments from Banxico officials hint at a possible rate cut in November, contradicting Governor Victoria Rodriguez Cej’s view.

The Mexican peso (MXN) printed a new seven-year high against the exchange rate American dollar (USD) as USD/MXN fell as low as 17.0360, extending its losing streak to four consecutive weeks. The Federal Reserve’s (Fed) decision to keep rates unchanged weakened the dollar, a headwind for USD/MXN, which continued to decline amid a risk-off push. At the time of writing, USD/MXN is exchanging hands at 17.0449.

Comments from Banxico officials in the spotlight: US consumer sentiment rises as inflation expectations soften

Wall Street has turned negative on OpEx’s triple witching, with nearly 4.2 trillion options expiring. However, amid the Fed’s hawkish comments, the risk-sensitive Mexican peso held on to its weekly and daily gains that followed the Fed’s decision.

Data from the United States (US) showed that inflation is cooling, but not at the pace the US central bank would like. But they failed to pull the trigger and waited until the July meeting, which will bring the first of two 25-basis-point rate hikes prized by investors who expect the first rate cut in early 2024.

This has driven USD/MXN to new seven-year lows over the past two days, though Fed policymakers revised cap rates upward, above the 5.50% mark.

On Friday, the US Agenda revealed that US consumer sentiment rose to 68.0 in May, above May’s final reading of 64.9. The same survey from the University of Michigan (UoM) showed that one-year inflation expectations fell from 4.2% to 3.3% in June.

Meanwhile, US Federal Reserve hawks were crossing wires, although they failed to support USD/MXN. Richmond Fed President Thomas Barkin said he wants to do “more” unless inflation slows. Fed Governor Christopher Waller added that slow progress in inflation “will likely require further tightening.”

On the Mexican front, the lack of economic data was no excuse for the MXN to continue gaining strength against the dollar. Comments from Bank of Mexico (Banxico) deputy governor Jonathan Heath opened the door for the Mexican central bank’s first rate cut in November. Contrary to his view, Banxico Governor Victoria Rodriguez Ceja noted that rates will remain unchanged at the current bank rate of 11.25% for at least two sessions. However, this did not open the door to policy relaxation.

Upcoming events

On the US front, Fed speakers would grab most of the headlines, along with the release of housing data and global S&P PMIs. On the Mexican front, the program will expose retail sales ahead of Banxico Monetary Policy decision.

USD/MXN Price Analysis: Technical Outlook

USD/MXN extended its slide past the 2016 low of 17.0509, poised to challenge 17.0000. While the oscillators remain in overbought conditions, with the Relative Strength Index (RSI) below 30, the three-day Rate of Change (RoC) suggests some selling pressure is ahead. However, failure to break the 17,000-point barrier could put sellers under pressure as Banxico’s monetary policy decision looms.

However, the path of least resistance in the near future is down. USD/MXN’s next stop will be 170000. if USD/MXN dips below this level, the psychological 16.50 will follow, before testing the October 2015 low of 16.3267. Conversely, pro-inflation risks for USD/MXN lie in the confluence of the May low of 15 and the 20-day exponential moving average (EMA) at 17.4038/42, followed by the 50-day EMA at 17.6963.

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