MEXICAN PESO TECHNICAL ANALYSIS:
- USD/MXN falls for a third day in a row and breaks below a key technical support
- US Dollar softness and rising risk-appetite this week has boosted the Mexican peso and many emerging market currencies
- Banxico’s monetary policy decision on Thursday can set the tone for MXN near term, especially if the central bank adopts a hawkish stance in light of mounting inflationary pressures
Broad U.S. dollar weakness in the last three days has pushed USD/MXN lower after last week’s temporary rally triggered by the Fed’s hawkish posture and the ensuing risk-off sentiment. With the latest pull-back, the pair has managed to break a critical support near the 20.30 area and looks poised to test the 200-day simple moving average in the near future.
Considering the aforementioned points, in the coming trading sessions, it would be important for Mexican peso traders to keep a close eye on price action to see how it reacts as it approaches its 200-SMA, now near the 20.20 zone. Should sellers manage to push the exchange rate below this key technical floor, USD/MXN will have fewer obstacles in its path to fall towards the 2021 low in the 19.55 region.
Alternatively, if EMFX falters again and USD/MXN resumes its rebound, the first technical barrier appears at 20.75, the June swing high. If buyers recapture this level, bullish momentum could strengthen, paving the way for a move towards a 12-month descending trendline near the 21.00 psychological mark.
Pivoting to fundamental analysis, volatility is likely to pick up in the next few days thanks to Banxico’s rate decision scheduled for Thursday afternoon. As we mentioned in our earlier preview, Mexico’s monetary authority is likely to maintain its overnight rate unchanged at 4.0%. The institution led by Alejandro Diaz de Leon could also adopt a more hawkish tone in light of mounting inflationary pressures, following in the footsteps of other EM central banks. A hawkish shift in forward-guidance will unequivocally close the door to future easing, priming investors for potential rake hikes in the second half of the year.
In the medium term, policy normalization in Mexico will create a more favorable backdrop for the Mexican peso, boosting its carry in the FX market. This scenario could reinforce the USD/MXN downtrend that began more than a year ago.
USD/MXN TECHNICAL ANALYSIS
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—Written by Diego Colman, DailyFX Market Strategist
Follow me on Twitter: @DColmanFX