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Dollar falls to two-week lows against Mexican peso awaiting Mexico’s inflation

  • USD/MXN drops to two-week lows below 18.00.
  • The US dollar remains weak as the chances of a Fed rate cut in September increase.
  • Focus on Mexico’s inflation data due out on Tuesday.

The USD/MXN has fallen to a thirteen-day low of 17.97 on Monday after opening the week around 18.12. At the time of writing, the pair is trading above 17.99, losing 0.60% on the day.

US Dollar Retreats Again as Chances of Fed Rate Cut in September Increase

The Dollar Index (DXY) has started the second week of July by retreating to its lowest level since June 13 at 104.80. The fall in the Dollar is closely related to the increased chances of the Fed making its first interest rate cut in September. CME Group’s FedWatch tool gives a 70.8% chance of this first rate cut today.

Dollar traders will be keeping a close eye on two events this week. First, Fed Chairman Jerome Powell’s statement to the US Senate, which could provide clues as to the Fed’s view on unemployment and inflation. Second, on Thursday, the US will publish the Consumer Price Index (CPI) data for June, which is expected to moderate to 3.1% year-on-year from 3.3% in May.

Mexico is keeping an eye on June inflation

Mexico’s National Institute of Statistics and Geography (INEGI) will publish its June inflation figures on Tuesday, with the annual CPI expected to rise to 4.84% from 4.69% in June. The monthly figure is expected to rise by 0.24% after falling by 0.19% the previous month.

Mexico will also publish consumer confidence figures for June tomorrow and on Thursday, the Banxico minutes from its June meeting. Finally, industrial production data for May will be released on Friday, pointing to an annual increase of 1.4% compared to the previous 5.1%.

USD/MXN Price Levels

With the pair trending downwards on hourly charts, the next downside target is at the 17.87 area, the low of June 24, before extending the decline towards the 17.00 area. On the upside, initial resistance appears at the 100-day moving average at 18.14, before targeting the 18.49/18.50 area, where last week’s (July 2) high is.

US Dollar FAQs

The United States Dollar (USD) is the official currency of the United States of America, and the de facto currency of a significant number of other countries where it is in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in daily transactions. Following World War II, the USD took over from the British Pound as the world’s reserve currency.

The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the dollar.

In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of the US dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing securities in new purchases. It is generally positive for the US dollar.

Source: Fx Street

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