USD/MXN retreats from weekly highs as the US economy decelerates, Fed's Beige Book showed

• The US Federal Reserve Beige Book flashes that the economy in the US is slowing down, led by inflation, hiring, and consumption.
• Money market swaps suggest that the Federal Reserve will hike 25 bps hike and then pause, with investors eyeing a November cut.
• USD/MXN Price Analysis: Resumed its downtrend, with sellers eyeing a crack of 18.0000.

The USD/MXN retreats from weekly highs and the 20-day EMA, even though the market sentiment shifted sour, as shown by Wall Street closing mixed. Ebbs and flows stayed at the emerging market currency, although the US Dollar (USD) appreciated against most G7 currencies. At the time of writing, the USD/MXN is trading at 18.0440, sliding a tiny 0.04%.

The US Fed’s Beige Book showcased that the economy is slowing down

Investors’ mood remained mixed throughout Wednesday’s session. The US Federal Reserve (Fed) revealed the Beige Book, which showed that the economy in the United States (US) is slowing while access to credit is narrowing. Delving into the book, hiring and inflation is slowing, price levels rose moderately, wages increased, and consumer spending “was generally seen as flat to down slightly.”

Given the backdrop, odds for a 25 bps rate hike, shown by the CME FedWatch Tool, remained at 86.7%, for the upcoming meeting, with traders expecting the Fed to stay put. Nevertheless, market players still expect the first rate cut by the November meeting.

Meanwhile,  the greenback continued to rise, as shown by the US Dollar Index advancing 0.23%, up at 101.958, underpinned by high US bond yields. The 2-year note is yielding 4.248%, four and a half basis points higher than Tuesday’s close.

Even though some Federal Reserve officials have pushed back against a recession, the Beige Book put it on the table. However, inflation remains high, and before the May meeting, the US central bank would need to digest its preferred measure of inflation, the Core PCE for March.

On Tuesday, two Federal Reserve policymakers commented that inflation remains too high and the labor market too tight, namely St. Louis Fed President James Bullard and Atlanta’s Raphael Bostic. Regarding monetary policy, their views diverged, as Bostic favors one more hike and hold rates put, while Bullard expects an additional 50 bps of tightening to lift rates to the 5.50%-5.75% range.

There are growing speculations on the Mexican side of things that the Bank of Mexico (Banxico’s) may pause the tightening cycle. That has gained adepts as the latest inflation report showed a deceleration, putting Banxico at risk of overtightening conditions.

USD/MXN Technical Analysis

From a technical analysis perspective, the USD/MXN is still downward biased. However, the recent leg-up tested the 20-day Exponential Moving Average (EMA) at 18.1635 but failed to hold its ground and dropped towards the 18.0500 area. That said, the USD/MXN next support would be 18.0000, followed by the YTD low at 147.8968. Conversely, for a reversal, USD/MXN buyers must reclaim the 20-day EMA, with upside risks at the 50-day EMAT at 18.3749. Once cleared, the USD/MXN can rally towards the 100-day EMA At 18.6999.