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Dollar plummets to five-week lows against Mexican peso awaiting US inflation

  • USD/MXN drops to five-week lows at 17.76.
  • The US dollar remains cautious as it awaits statements from Jerome Powell and other Fed members
  • The focus now turns to US inflation data due out on Thursday.

The USD/MXN has been hitting progressively lower lows for seven days in a row. The pair has dropped today from a daily high at 17.92 to a five-week low at 17.76. At the time of writing, the pair is trading above 17.82, losing 0.49% on the day.

US Dollar Cautiously Awaiting Fed Statements

US Federal Reserve Chairman Jerome Powell is to appear before Congress for the second day in a row, after saying on Tuesday that greater confidence in the decline in inflation is still needed to begin cutting rates. Later in the day, statements are expected from Austan D. Goolsbee, president of the Chicago Fed, and the governors of the Federal Reserve Board, Michelle Bowman and Lisa Cook.

The Dollar Index (DXY) has moved cautiously today between the 105.16 and 105.01 area, waiting for some clue in the Fed’s statements on the inflation data to be released tomorrow. For the moment, the CME Group’s FedWatch tool maintains the probability of a first interest rate cut at the Fed’s September meeting at 71.8%.

On Thursday, the United States will publish its June inflation figures, a data that could generate high volatility in the US dollar currency pairs. Annual inflation is expected to slow to 3.1% annually in June from 3.3% in May, although Powell’s comments yesterday could imply that the moderation has been less.

In Mexico, sales data for heavy vehicles in June were published today. A total of 4,573 were sold at retail and 6,784 at wholesale, which implies a -2.4% and +36.5% year-on-year, respectively.

USD/MXN Price Levels

The USD/MXN is clearly pointing to a bearish trend on the hourly chart. A continuation of the decline will find initial support at the 100 moving average on the daily chart, located at 17.20. Below it lies the 17.00 zone, a psychological level, and 16.91, the low of June 3.

On the upside, initial resistance awaits at the 18.00 area before running into a major barrier around 18.50, where the July high recorded on the 2nd is located.

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 transactions per day. 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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