Mexican Peso carry cushion thins as USD/MXN breaks 100-day SMA

The Mexican Peso extended its losses for the third straight trading session, down over 0.43% as investors reduce their exposure to the Mexican currency following last week’s Fed decision to raise rates. At the time of writing, the USD/MXN trades at 17.29, clearing the 100-day Simple Moving Average (SMA) at 17.26.

Narrower rate differential, soft retail sales pressure the Mexican Peso

Last Wednesday, the Federal Reserve increased the Fed funds rate by 25 basis points to the 3.75-4% range, while rates in Mexico remained anchored at 6.50% as the Bank of Mexico (Banxico) finished its easing cycle. Therefore, the interest rate differential between Mexico and the US has narrowed to 2.50% in favor of the Mexican Peso, its lowest level since 2015.

The 6.50% interest rate differential reached in February 2023 favoured the Mexican Peso, which fell to its lowest level as USD/MXN hit its April 2020 high of 25.78. After this, the exotic pair reversed course, falling to its lowest level in almost nine years in April 2024 at 16.26.

Aside from this, data from Mexico showed that August’s Retail Sales improved from a -0.2% MoM contraction to -0.1% but missed estimates of a 0.2% expansion. In the twelve months to August, it decelerated from 2.9% to 1.8%.

In the meantime, hopes for an end to hostilities in the Middle East shifted market sentiment, but the Mexican Peso failed to gain traction, as Banxico is expected to hold rates unchanged at the September 24 meeting. Additionally, hawkish commentary by Fed officials is setting the stage for another rate increase, if not by October, then by the December meeting, with odds standing at 90%, according to Prime Terminal.

Richmond Fed President Thomas Barkin said inflation would take time to ease and more rate hikes might be needed to reach the 2% goal. Boston Fed President Susan Collins supported a hike; warning of high inflation risks and a greater chance inflation stays above 2%.

Up next, the Mexican economic docket will feature the Banxico Interest Rate Decision. In the US, Flash PMIs, jobs data, consumer sentiment and Fed speaking would be the catalysts for the USD/MXN pair.

USD/MXN Price Forecast: Technical outlook

In the daily chart, USD/MXN trades at 17.2914, extending its recovery above the latest reading of the 50/100/200-day simple moving average cluster at 17.1558, which now acts as underlying support and tilts the near-term bias bullish. Price is still well below the two descending resistance trend lines drawn from 18.1651 and 21.0808, suggesting the broader downtrend remains intact even as the pair rebounds. The Relative Strength Index (14) at 65.1 sits in bullish territory but shy of overbought, hinting that upside momentum is strong yet not extreme.

On the topside, initial resistance is seen near the nearer downward trend-line reference at 18.1651, ahead of the higher structural barrier around 21.0808, where prior selling pressure originated. On the downside, immediate support is provided by the multi-period simple moving average cluster at 17.1558, with a stronger horizontal floor emerging at 16.8866; as long as USD/MXN holds above these levels, pullbacks are likely to be treated as corrective within the current bullish phase.