USD/MXN flashes signs of recovery and climbs above 18.1000 on risk aversion

• USD/MXN rallies on sentiment deterioration, triggering flows toward the safety of the US Dollar.
• Reports by Federal Reserve’s Regional Banks showed the US economy is stagnating.
• Banxico is set to pause its tightening cycle, as the latest inflation report in Mexico showed that prices are easing.

The USD/MXN shows flashes of recovery and rallies more than 0.70% on sentiment deterioration, thus denting appetite for the emerging market currency, the Mexican Peso (MXN). The First Republic Bank, which took over the troubled Silicon Valley Bank (SVB), missed estimates and reignited March’s fears of a banking crisis. Therefore, the USD/MXN climbed and is trading at 18.1057.

USD/MXN sees rally on sentiment downturn as Banxico pauses tightening cycle amid easing inflation

Wall Street is set to finish the day with substantial losses. Reports that First Republic Bank witnessed greater-than-expected withdrawals in the first quarter turned the mood sour. Several Federal Reserve (Fed) Regional Banks released their Manufacturing and Services Indices, indicating that the slowdown in the US economy is persisting. Moreover, the Conference Board (CB) released the Consumer Confidence report for April, which was lower than the estimated 104 at 101.3. The report revealed that consumers are increasingly pessimistic about the economy and expect the labor market to weaken.

The USD/MXN reacted upwards once the North American session began, bouncing from daily lows at around 17.9504 and rising towards the daily high at 18.1444 before stabilizing around current exchange rates.

In the meantime, the greenback appreciated, as shown by the US Dollar Index (DXY) gaining 0.53$, at 101.942, despite US Treasury bond yields falling. The CME FedWatch Tool indicates that the odds for a 25 bps rate hike at the May meeting diminished from 84% in the early New York session to 76.6%.

In other data, US New Home Sales in March rose by 683K above estimates of 632K, a signal that easing mortgage rates is helping curb the housing market.

Due to the lack of economic data in the Mexican economic agenda, the latest inflation report showed that it slowed down to 6.24% in April, its lowest level since October 2021. Nevertheless, core inflation remained at 7.75% for the first half of April, suggesting that the Bank of Mexico (Banxico) could pause its tightening cycle.

USD/MXN Technical Analysis

The USD/MXN continues tracking the 20-day EMA at 18.1170, as its dynamic resistance for the last couple of weeks. As of writing, it’s bracing to the EMA abovementioned, though it would need a daily close above it, to pave the way for further upside. If that scenario continues, the USD/MXN’s next resistance would be the 50-day EMA At 18.3222, followed by the April MTD high at 18.4010. Conversely, the USD/MXN could dip towards 18.0000 before testing the daily low at 17.9505.