USD/MXN soars past key resistance as US data fuels November’s Fed hike speculation

• USD/MXN pair breaks crucial resistance at 17.4038, trading at 17.5481, as US ISM Non-Manufacturing PMI beats expectations, renewing rate hike possibilities.
• US 10-year Treasury yields and the Dollar Index surge, with odds for a November Fed rate hike jumping to 47.2%, according to the CME FedWatch Tool.
• Mexico’s inflation data, due Thursday, is expected to slow down; the Bank of Mexico is unlikely to cut rates.

The Mexican Peso (MXN) extended its losses versus the US Dollar (USD) on Wednesday, climbing above a crucial resistance level seen at 17.4038, which, if it holds, could pave the way for further upside. Data from the United States (US) put rate hike expectations back on the table, boosting the Greenback. The USD/MXN is trading at 17.5481 after hitting a daily low of 17.3912, gains 0.78%.

The Mexican Peso weakens vs. the US Dollar amid rising US bond yields and data increasing speculations for further tightening

Earlier in the North American session, the Institute for Supply Management (ISM) announced that business activity in the services segment, the Non-Manufacturing PMI for August, was better than expected, with the reading coming at 54.5 from the 52.5 expected and above July’s 52.7. The same report showed that the price index subcomponent climbed by 58.9 in August from 56.8 in July.

Following the data, expectations for further tightening by the Fed grew. The CME FedWatch Tool shows odds for a 25 bps increase in November hit 47.2%, above yesterday’s 42% chance. Furthermore, rates are also expected to stay at the 5.50%-5.75% range for December before the US central bank cut rates early in 2024.

Consequently, US Treasury bond yields soared, with the 10-year benchmark note rate at 4.296%, gains 10 basis points, while the US Dollar Index reached a seven-month high of 105.024, up 0.21%.

In the meantime, Boston Fed’s President Susan Collins said the US central bank needs to be patient when deciding the path of monetary policy while stressing the central bank’s commitment to tame inflation to its 2% target. She added Fed officials are discussing if the current level of rates is restrictive enough or more is needed.

Across the border, Mexico’s inflation expected on Thursday would likely shrink for the seventh straight month, according to a Reuters poll. Analysts expect headline inflation at 4.61% while estimating that core would slow to 6.12%, the lowest reading since December 2021. In the meantime, the Bank of Mexico (Banxico) is not expected to cut rates, as said by its Governor Victoria Rodriguez Ceja.

Upcoming events in the week would feature the Mexican Consumer Price Index (CPI), estimated to slow down. On the US front, Initial Jobless Claims, alongside the Fed officials parade ahead of their blackout period for the upcoming September meeting, would shed some clues regarding monetary policy stances.

USD/MXN Price Analysis: Technical outlook

From a technical standpoint, the pair is getting upward traction, set to test the May 23 swing high of 17.9976, some pips shy of the 200-day Moving Average (DMA) at 18.0879. A decisive break of that area could expose the April 5 daily high at 18.4010, followed by the 18.5000 psychological level. Conversely. If the USD/MXN drops below the May 17 daily low of 17.4038, that would pave the way for further losses. Next, support would emerge at the 100-DMA at 17.2788, followed by the 20-DMA at 17.0221.

USD/MXN Price Action – Daily chart