USD/MXN: MXN surrenders to USD amidst crucial week for Banxico decision, Fed’s Powell speech eyed

• USD/MXN pair surges over 0.80%, with market focus on impending Banxico and US Fed monetary verdicts.
• Despite hawkish Banxico tones, no rate hikes are projected; Fed maintains rate-hike caution.
• Key focus: Powell’s forthcoming testimonies and Banxico’s policy decision; US Housing Starts soar 21.4% MoM.

The Mexican Peso (MXN) surrenders against the US Dollar (USD) as the USD/MXN trades with gains of more than 0.80% after hitting a daily low of 17.0499 in a week that would feature the Bank of Mexico (Banxico) monetary policy decision. That, alongside Federal Reserve (Fed) Chair testimony at the US Congress, would likely drive the USD/MXN pair direction. At the time of writing, the USD/MXN trades at 17.2119.

USD/MXN surges as investors await clarity from Banxico and Federal Reserve; US Housing Starts hit a 13-month high

The USD/MXN is bolstered by a risk-off impulse, as shown by US equities trading with losses. In the June monetary policy decision, Banxico is expected to keep rates unchanged, as demonstrated by a Reuters poll on Tuesday. Twenty analysts surveyed see the central bank holding rates unchanged at 11.25% for back-to-back meetings. It should be said that the latest Mexico inflation report showed annual CPI coming below the 5.90% foreseen by analysts at 5.84%

Also, comments made by Governor Victoria Rodriguez Ceja and Deputy Governor Jonathan Heath suggest Banxico will keep rates higher for longer. However, no more hikes are expected, with market participants, expecting a rate cut “at least” until the fourth quarter, according to Goldman Sachs Alberto Ramos.

Aside from this, the Fed skipped raising rates during the last week, though its policymakers upwards revised peak rates above the 5.50% threshold, as shown by the dot-plot. The Summary of Economic Projections (SEP) revealed that 12 of 18 Fed board members tweaked their monetary policy expectations, which bolstered the greenback.

Nevertheless, Fed Chair Powell’s press conference downplayed the dot plots, hurting the prospects of the greenback, which gave back most of its earned gains.

Over the weekend, comments by Fed Governor Christopher Waller and Richmond’s Fed Thomas Barkin leaned hawkish, with both favoring additional tightening if needed. The Fed Watch tools portray investors seeing a 72% odds of a 25 bps hike in July, but the swaps markets are not buying the 50 bps increases towards the year-end.

Earlier, the US economic agenda featured Housing Starts jumping to a 13-month high, as shown by May’s data displayed by the US Commerce Department. Housing Starts rose by 21.4% MoM, crushing the prior month’s plunge of -2.9%, while Building Permits expanded by 5.2%, above -1.4% contraction in April.

Upcoming events.

The Fed Chair Jerome Powell’s testimony at the US Congress on Wednesday and Thursday is expected to keep the press conference tone. USD/MXN traders must be aware of the language used by Powell, particularly on Wednesday. The Bank of Mexico will reveal its monetary policy decision on Thursday at around 19:00 GMT.

USD/MXN Price Analysis: Technical outlook

The USD/MXN recovery failed to test the 20-day Exponential Moving Average (EMA) at 17.3599 but erased two days of consecutive losses. If USD/MXN achieves a daily close above the June 15 high of  17.2533, that could exacerbate a rally toward the 20-day EMA. A subsequent break of the latter will expose the May 16 swing low support turned resistance at 17.4038, ahead of testing July 2017 lows of 17.4498. Failure to conquer 17.25 on a daily close could pave the way to re-test YTD lows of 17.0219.