USD/MXN soars above 21.05, to highest in a week ahead of FOMC and Banxico

• Mexican peso drops across the board during the American session.
• After giving signs of a bottom, USD/MXN jumps above 21.00 erasing most of last week’s losses.

The USD/MXN is sharply higher on Tuesday after staging a rally during the American session. The pair climbed from 21.00/05 to 21.20, reaching the highest level in a week. It remains near the top, supported by a stronger US dollar and also by a broad decline of the Mexican peso.

The greenback gained momentum following US IPP data and particularly ahead of the FOMC decision. On Wednesday, the central bank will announce its decision. It is expected to accelerate the tapering of its purchase program.

Higher US yields and a decline in equity prices is weighing on emerging market currencies. The Mexican peso was holding well, until USD/MXN broke decisively above 21.05. The next resistance stands at 21.30, followed by 21.45. On the flip side, a slide back under 21.05 should alleviate the current bullish pressure.

On Thursday, the Bank of Mexico will have its monetary policy meeting with the most analysts looking for a 25 bp rate hike. Analysts at TD Securities expect Banxico to hike by 25bps and continue to present a hawkish stance, though they warn about some risk of a 50bps rate hike. “MXN still presents reasonably good yield, though competition in Latam is heating up, and risk surrounding the monetary policy and fiscal trajectory are increasing.”

Technical levels