USD/MXN Update: Mexican Peso Strengthens as Inflation Surprises

The USD/MXN pair has posted four consecutive daily losses, leading to a decline of over 0.5% in the short term in favor of the Mexican peso. This bullish sentiment for the peso has remained steady as investors assess Mexico’s latest inflation data, a factor that could be decisive in the next monetary policy decision and become a key catalyst for the market.

Inflation in Mexico

Recent data shows that inflation in Mexico continues to exceed expectations. The consumer price index (CPI) for May came in at 4.42%, marking an increase from the previous figure and remaining above the 3% target range set by Banco de México (Banxico).

Chart: Inflation Data – Mexico

Source: TradingEconomics

This result could prove significant for Banxico’s next meeting, scheduled for Thursday, June 26. In its last decision, the central bank cut the interest rate by 50 basis points, adopting a flexible stance to support economic activity. However, given the renewed rise in inflation, the bank may pause further rate cuts in response to the growing inflation risk.

In this context, a more hawkish stance by Banxico could become a positive driver for the Mexican peso. Mexico currently holds an interest rate of 8.5%, well above the 4.5% maintained by the U.S. Federal Reserve. This yield differential could boost demand for peso-denominated assets, helping to strengthen the currency and increase downward pressure on USD/MXN in the short term.

What’s Happening with the Dollar?

The DXY index, which tracks the strength of the U.S. dollar against a basket of six major currencies, has shown a sustained downtrend in recent sessions. It is currently trading below the key 100-point mark, indicating broad-based weakness in the U.S. dollar against its main counterparts.

Source: MarketWatch

The dollar is currently facing persistent uncertainty tied to trade conflict dynamics. Although negotiations between the U.S. and China continue, the lack of progress has weakened market confidence. Without a clear resolution in sight, appetite for the U.S. dollar as a safe-haven asset has diminished, reinforcing its decline.

In this environment, the Mexican peso appears to be capitalizing on dollar weakness. If the DXY continues to slide, selling pressure on USD/MXN could intensify further in the coming sessions.

USD/MXN Technical Outlook

Source: StoneX, Tradingview

• Downtrend Remains Intact: Since April 9, USD/MXN has maintained a steady bearish trend, characterized by lower highs and lower lows, which confirms the dominant selling pressure. The price has consistently traded below 19.50 pesos per dollar, reinforcing the short-term bearish structure. So far, there has been no significant bullish correction to challenge this trend. Moreover, a bearish crossover between the 100-period and 200-period moving averages has occurred, an event that could signal increased selling momentum. If this pattern holds, the pair is likely to continue drifting lower, particularly if fundamentals remain in favor of the peso.

   

• ADX: The ADX index remains near the neutral 20 level, reflecting low volatility. If this trend continues, it could indicate a temporary pause in the trend, allowing for some price consolidation or pullback.

• RSI: The RSI is currently showing a bullish divergence, with lower lows in price contrasting with higher lows in the RSI, signaling a potential imbalance in market forces. This setup may lead to short-term bullish corrections.

   

  Key Levels:

   

• 19.64 – Key Resistance: Marks recent multi-month highs. A break above this level could threaten the prevailing bearish trend and trigger a bullish shift.

   

• 19.28 – Near-Term Barrier: A recent consolidation zone aligned with the downtrend. It may act as technical resistance to any short-term rebounds.

   

• 19.00 – Key Support: A psychological level and the most important bearish barrier currently. A decisive break below this level could reactivate the bearish bias and open the door to further downside.

Written by Julian Pineda, CFA – Market Analyst

Follow him at: @julianpineda25