KEY POINTS IN THE MEXICAN PESO: Inflationary pressures in the United States lift the dollar across the board, with USD/MXN surging more than 1% towards the 20.06 mark. The peso’s depreciation, on the other hand, could be short-lived if the Fed keeps to its script and reiterates that the rise in consumer prices is only temporary. The USD/MXN pair’s important technical levels are presented in this article.
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The DXY Index, which measures the value of the US dollar, rose on Tuesday, owing to rising inflationary pressures in the US. Data released earlier today indicated that the June Headline CPI climbed 5.4 percent year over year, the highest level since 2008. Core inflation, which excludes food and energy, rose 4.5 percent year over year, the highest rate since November 1991. The hot data pushed the 2-year treasury yield up to 0.267 percent from 0.230 percent, as traders wagered that the Fed will be forced to withdraw assistance sooner than planned. Following the release of the CPI report, for example, the probability of a 25 basis point rate hike at the June 2022 FOMC meeting increased to 30% from 24.4 percent the day before. Investors were startled by rising short-term Treasury yields on predictions of interest rate hikes, resulting in moderate losses in the EMFX area. In this environment, the Mexican peso lost almost 1% of its value throughout the day, with USD/MXN rising from 19.88 to 20.06. This shift, however, cannot be wholly attributable to recent macroeconomic changes in the United States. Mexico’s government intervention in the energy industry, as well as AMLO’s commitment to constitutionally reform the electrical market, looked to worsen MXN’s weakness. In any event, returning to the fundamentals of US inflation, supply bottlenecks and rising expenses linked with the reopening of the economy were the key causes of last month’s astronomical increase in consumer prices (e.g. used vehicles accounted for one-third of the increase in CPI). This might provide the Fed with enough cover to keep to its transitory inflation theory, preventing monetary tightening expectations from spiraling out of control. When the dust settles and the market noise fades, nominal yields should remain relatively stable, avoiding significant DXY appreciation. Due to its carry advantage, which is bolstered by Banxico’s current tightening cycle, this scenario is likely to help the Mexican peso. That said, it wouldn’t be surprising to see dollar bearish downplay the recent USD/MXN increase. USD/MXN TECHNICAL EXAMINATION Despite the surge on Tuesday, USD/MXN appears to be stuck in a consolidation phase, locked between resistance (20.20) and support (20.10). (19.80). The pair would have to significantly move beyond either of those levels for pricing to establish a distinct short-term directional bias. If resistance is broken, USD/MXN might drift towards the 20.75 zone, where the June high intersects with a long-term falling trendline that has been in action since June of last year. If the exchange rate falls below 19.80, sellers may seize control of the market and drive prices down to the 2021 bottom in the 19.55 range. Last but not least, if this support fails to hold, the psychological level of 19.00 would become the next level of concern on the downside. Visit understand more about technical analysis, go to DailyFX Education. USD/MXN TOOLS FOR TECHNICAL CHARTEDUCATION FOR TRADERSA Are you just starting out? Download our FX trader’s handbook for beginners. Would you like to learn more about yourself as a trader? Take our quiz to learn how IG’s client positioning data can help you understand market sentiment. Here’s where you can get a free guide on how to use this strong trading indicator. For weekly market updates and incisive analysis, sign up for the DailyFX Newsletter. —- Diego Colman, DailyFX Market Strategist, wrote this article. @DColmanFX is my Twitter handle./n
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