USD/MXN retreats as mixed US inflation data muddles Fed rate hike path

• USD/MXN trades at 17.1200, down 0.53%, after US CPI for August comes slightly above the 3.6% forecast.
• CME FedWatch Tool indicates a 41% chance of a 25 bps rate hike in November, keeping traders cautious.
• Upcoming US labor and retail data and Banxico’s 11.25% TIIE could push USD/MXN to test the 17.0000 level.

The Mexican Peso (MXN) shrinks its losses and stages a comeback against the US Dollar (USD), after data from the United States (US) further cemented the case for the US Federal Reserve to hike rates at the September meeting. The USD/MXN is trading at 17.1200, down 0.53, after reaching a daily high of 17.2919.

Mexican Peso rebounds vs. the Greenback amid uncertainty over US monetary policy

US inflation exceeded estimates, as August’s Consumer Price Index (CPI) came at 3.7% YoY, while forecasts saw inflation at 3.6% above July data. Contrarily, core inflation dropped from 4.7% YoY in July to 4.3%, as projected by analysts, painting a mixed picture of inflation. Nevertheless, the data failed to price in additional tightening by the US Federal Reserve (Fed), as shown by money market futures data.

The CME FedWatch Tool still sees the Fed would keep rates at around the 5.25%-5.50% range for the upcoming September meeting, but for November, odds for a 25 bps rate hike are at 41%.

Nevertheless, USD bears are not out of the woods yet, as labor market data still shows signs of a hot jobs market. Unemployment claims for the last week are expected to rise to 225K, above the previous 216K reading. That, alongside August’s Retail Sales report, which is foreseen to come weaker than July’s numbers, could cement the case for an end of the Fed’s tightening cycle.

Additional inflation data will be revealed on Thursday, with the Producer Price Index (PPI) foreseen to continue decelerating.

If the data shows signs of an economic slowdown for the US, expect the USD/MXN to test the 17.0000 figure, as the interest rate difference between Mexico and the US favors the former, with Banxico’s TIIE at 11.25%, compared to the effective Federal Funds Rate (FFR) at 5.33%.

USD/MXN Price Analysis: Technical outlook

Even though the USD/MXN has retraced somewhat, the pair remains neutral to upward bias unless Mexican Peso buyers reclaim the August 28 daily low of 16.6924. However, it could challenge the psychological 17.00 figure, but traders must crack solid support standing in its way. Before testing the former, the 20-day Moving Average (DMA) is at 17.0902, followed by the 50-DMA at 17.0108. Conversely, a bullish continuation would resume once buyers reclaim the 100-DMA at 17.2452.