MEXICAN PESO KEY POINTS: The Mexican peso appreciates after Federal Reserve Chairman Powell says the US economy has not advanced far enough to begin reducing support and advises against acting prematurely. The USD/MXN pair pivots lower, retracing the majority of the previous day’s rise. The medium-term outlook for the Mexican peso is positive, thanks to its favorable carry and improving fundamentals.
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Most popular: DXY Strikes a Key Resistance Point. What is the Technical Outlook for the US Dollar? Following a significant spike in USD/MXN (US dollar vs. Mexican peso), I argued that traders might short the gain in the near term provided the Federal Reserve stuck to its transitory inflation theory and adopted its accommodating monetary policy stance with conviction. On Wednesday, the exchange rate retraced most of Tuesday’s gains, sliding 0.9 percent to 19.86 at the time of writing. The Fed Chairman Powell’s congressional testimony, in which he warned against acting prematurely and assured lawmakers that inflation is temporary and that “substantial further progress” in the economy is still a ways off, triggered the dollar’s weakness and broad-based EMFX’s strength on display today. These comments have dampened expectations that the central bank will soon begin to pare its purchases, lowering treasury rates across the board. Despite intermittent market noise, high-yielding emerging currencies, particularly those with high-carry adjusted for volatility, remain a strong outlook against the greenback, as I have noted multiple times in recent weeks. While there are near-term dangers, such as slowing global growth and rising delta-variant Covid-19 instances, yield differentials in a liquidity-saturated environment and the Fed’s dovish stance on quantitative easing can be seen as positive aspects (for EMFX). In the case of the Mexican peso, bullish drivers include Banxico’s tightening cycle in reaction to rising inflationary pressures, Mexico’s better economic backdrop assisted by robust external demand, and rising oil prices. All of these variables combine to provide a good medium-term environment for the MXN. From a technical standpoint, the USD/MXN pair is trapped in a consolidation phase, with price movement constrained between resistance (20.20) and support (20.20). (19.80). Either of these levels would have to be decisively broken for the pair to establish directional conviction. If resistance is overcome, USD/MXN could drift towards the 20.75 level, where the June high coincides with a long-term falling trendline that has been in action since June 2020. If price falls below 19.80, however, selling pressure could build, triggering a move towards the 2021 bottom of 19.55. If this support fails, the psychological level of 19.00 will be brought into focus. TOOLS FOR TECHNICAL CHARTEDUCATION OF THE USD/MXN 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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