USD/MXN hits YTD low below 17.10 as Fed holds rates, Powell's dovish tilt wobbles USD

• USD/MXN plunges to a near seven-year low after Fed’s rate decision.
• Powell indicates possible ‘moderation’ in rate hikes, spurs USD/MXN drop.
• Despite bullish projections in SEP, the dollar weakens as policymakers hint at future tightening.

USD/MXN fell to new year-to-date (YTD) lows of 17.0900 after the US Federal Reserve (Fed) decided to hold rates at the 5.00%-5.25% range after ten consecutive meetings of interest rate increases. Initially weakened the Mexican Peso (MXN), but Powell’s stance tilted “slightly dovish,” triggering a leg-down on the USD/MXN. The USD/MXN is trading at 17.0990, nearby new seven-year lows.

Pause in rate hikes ignites Mexican Peso’s rally; markets eye future Fed moves.

Fed Day came on Wednesday, and Fed Chair Jerome Powell and company delivered its first pause as a sign, according to him, of “moderation” on its tightening cycle. In their monetary policy statement, Fed officials highlighted the labor market remains robust, the unemployment rate low, and inflation elevated. Nevertheless, tightness on credit conditions and the cumulative tightening weighed on Powell and Co. to keep rates unchanged.

Aside from the statement, the Summary of Economic Projections (SEP) surprised the markets, with 12 policymakers expecting at least 50 bps of additional tightening to the Federal Funds Rate (FFR), moving the needle up to 5.6%, according to the median.

Delving deeper into the SEP, growth is expected to be higher than March’s 0.4%, at 1%, while the Unemployment Rate was downward revised to 4.1%. The Fed’s preferred gauge for inflation, the core PCE is predicted to hit 3.9% by year’s end, up from 3.6% in March.

Back to Jerome Powell’s press conference, he said the Fed is watching credit conditions and keeping the door open for July’s monetary policy meeting. He said the Fed would decide its policy meeting by meeting, suggesting everything is on the table for July.

After the Fed and Jerome Powell’s conference, the US Dollar Index (DXY) settled for a close above 103.000, though it did not weigh on the USD/MXN pair, which extended its losses below 17.10. US Treasury bond yields finished unchanged, with the 10-year benchmark note rate at 3.79%, three bps below its high of the day.

USD/MXN Price Analysis: Technical outlook

Following the Fed’s decision, the USD/MXN remains set to test the 17.00 psychological level, but firstly, USD/MXN sellers would need to challenge the 2016 low of 17.0509. Oscillators led by the Relative Strength Index (RSI) indicate the pair is oversold, while the three-day Rate of Change (RoC) depicts sellers losing momentum.

Nevertheless, a bearish continuation would put into play the 17.0000 figure. Once broken, the next support would be 16.5000 before tumbling toward an October 2015 low of 16.3267. Contrarily, if USD/MXN buyers want to shift the trend to neutral, they must conquer May 16 low-turned resistance at 17.4038.