USD/MXN drops to seven year new lows due to Fed skip, Mexico inflation cools

• USD/MXN falls to seven-year lows, down by 0.63%.
• Mexico’s deflationary process sees May’s CPI falling more than expected, predicted to keep Banxico from raising rates.
• Upbeat market sentiment and expectations for a Fed rate pause ahead of next week’s FOMC meeting weigh the USD.
• Futures market pricing has a 33% chance of a Fed hike next week 90% chance in the July meeting.

USD/MXN falls to new seven-year lows as the Mexican Peso (MXN) continues to appreciate sharply against the US Dollar (USD), even though the Mexican central bank is expected to keep rates higher for longer. The USD/MXN is trading at 17.2695, below its opening price.

Mexican Peso continues to strengthen against the US Dollar

A risk-on impulse keeps weighing on the greenback ahead of an important week for the US Federal Reserve (Fed), which is set to keep rates unchanged at 5.00%-5.25%. Wall Street is posting solid gains while traders brace for the next week’s FOMC meeting.

Meanwhile, the deflationary process in Mexico is well underway; according to the Instituto Nacional de Estadistica, Geografia e Informatica (INEGI), with the Consumer Price Index (CPI) in May falling -0.22% MoM, well below estimates of -0.16%. Anually based, CPI fell below the prior’s month 6.29%, at 5.84%, beneath the consensus of 5.9%.

That would keep the Bank of Mexico (Banxico) from raising rates, as its Governor Victoria Rodriguez Ceja mentioned, saying the central bank will keep rates unchanged for the next two meetings.

Across the border, an absent economic docket keeps investors leaning on market sentiment, which is upbeat, with the S&P 500 turning bullish after gaining more than 20% from its latest dip. Regarding the Fed’s next monetary policy meeting, money market futures are pricing a 33% chance the Fed will hike next week. Nevertheless, odds are at 90% for the July meeting after two major central banks, which kept rates on pause, scrambled to tighten conditions as inflation resumed upwards.

USD/MXN Price Analysis: Technical outlook

From a technical perspective, the USD/MXN is poised to test lower levels after breaching July’s 2017 lows of 17.4498. In an article on Thursday, I mentioned that the pair “appears to be bottoming” and that a double bottom could be forming, but price action negated the chart pattern. Therefore, further downside is expected, with 2016 lows at 17.0500 to be tested soon, followed by the 17.00 figure. Conversely, if USD/MXN buyers reclaim, the lows of 2017 at 17.4498 could exacerbate further MXN weakness and lift the pair towards the 20-day EMA at 17.5753.