USD/MXN stays firm as Banxico halts rate hikes; buyers target 18.0000

• Banxico leaves interest rates unchanged at 11.25%, ending the hiking cycle initiated in June 2021, causing a muted reaction in the USD/MXN.
• Banxico’s statement indicates a disinflationary process underway, yet it acknowledges a complicated and uncertain inflationary outlook with potential upside risks.
• The USD/MXN exchange rate experiences limited reaction, maintaining a position above the 17.7000 figure, with the 18.0000 level eyed as the next key resistance.

The Mexican Peso (MXN) depreciates sharply after the Bank of Mexico’s (Banxico) decision to keep rates unchanged at 11.25%, ending its hiking cycle in June 2021 after 700 basis points of increases. At the time of writing, the USD/MXN is trading volatile at around the 17.70000 – 17.7500 area, with US Dollar (USD) buyers eyeing the 18.000 psychological barriers.

Summary of the monetary policy statement by Banxico

Bank of Mexico based its decision even though core inflation has shown some resistance to decline, but commented that several central banks halted their reference rates. Banxico assessed the global economic growth as tilted to the downside but commented that inflation in Mexico has decreased since the last monetary policy meeting, emphasizing that core inflation decreased more “markedly than in previous months.”

The Governing board evaluated the magnitude and diversity of the inflationary shocks and considered the economy has started to undergo a disinflationary process, given that many pressures have eased. The board will monitor inflationary pressures and “estimates that the inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks.”

The Governing Board finalized the statement saying they will maintain the reference rate at its current level for an extended period.

Must read: Mexico: After 15 consecutive hikes, central bank keeps key rate unchanged at 11.25%

USD/MXN Reaction

The USD/MXN reaction was muted, with the exchange rate holding above the 17.7000 figure after clashing earlier in the day with the 20-day Exponential Moving Average (EMA) at 17.7682, limiting the rally on the USD/MXN. Above that level, the psychological 18.0000 figure emerges, ahead of the 50-day EMA at 18.0332

On the downside, any drops below the May 17 high of 17.6914 could open the door to retesting lower levels, at around 17.6000, followed by the lows of July 2017 at 17.4500.