USD/MXN climbs sharply as traders prepare for a Fed rate hike in May

• USD/MXN rises amid speculation that Banxico’s will pause while the Fed tightens conditions.
• St. Louis Fed President Bullard advocates for continued rate hikes in the US; see rates between 5.50% - 5.75%.
• Atlanta Fed President Bostic expects one more rate hike and a pause.

The Mexican Peso (MXN) continues to weaken for the second consecutive day, despite overall American Dollar (USD) weakness across the board. Outflows from the emerging market currency increased, spurred by an almost certain case for a 25 bps rate hike by the Federal Reserve (Fed) at the May meeting. At the time of writing, the USD/MXN is exchanging hands at 18.0719 after hitting a low of 17.9625.

Sentiment shifted sour, weakening the Mexican Peso, on possible central bank divergence

US equities fluctuate with market participants assessing Q1 earnings. Federal Reserve officials continued reinforcing their hawkish stance, though they failed to bolster the greenback. The US Dollar Index (DXY), which tracks the performance of six currencies vs. the buck, drops 0.31%, at 101.770.

The reasons behind the USD/MXN rise could be attributed to ebbs and flows. Estimates that the Bank of Mexico (Banxico) is about to end its tightening campaign weighed on the Mexican Peso. Additionally, a deceleration in inflation increased the odds for a Banxico’s pause.

On the US front, the St. Louis Fed President James Bullard commented that the Fed should continue to raise rates as the latest tranche of inflation data proved to be stickier than estimated. “Wall Street’s very engaged in the idea there’s going to be a recession in six months or something, but that isn’t really the way you would read an expansion like this,” Bullard said.

Bullard added that he feels rates need to go between 5.50% - 5.75%.

Data-wise, the US economic docket featured Building Permits and Housing Starts, which decreased by 0.80% MoM in March, after February’s 7.3% jump (downward revised from 9.8%). Building Permits dropped 8.8%, below estimates for a 1.45% gain, though February’s figures were upward revised to 15.8% from 13.8%.

In the meantime, Federal Reserve’s expectations for the May meeting lie at an 86.7% chance for a 25 bps hike, according to the CME FedWatch Tool.

Lately, the Atlanta Fed President Raphael Bostic said he favors one more rate hike and then a pause. Bostic commented that inflation would take some time to return to the Fed’s target and that his baseline does not foresee a recession.

USD/MXN Technical Analysis

From a technical analysis perspective, the USD/MXN is still downward biased. However, the recent leg-up could put up a test to the 20-day Exponential Moving Average (EMA) at 18.1772, which, once cleared, could exacerbate a rally, initially to the 50-day EMA at 18.3889. Break above, and the USD/MXN pair could rally toward the 100-day EMA at 18.7133. Conversely, if USD/MXN drops beneath 18.0000, that could open the door for a re-test of the YTD low at 17.8968.