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The Dollar jumps to 14-month highs against the Mexican Peso

  • The USD/MXN has staged a strong rise that has taken it to fourteen-month highs at 18.65.
  • The US dollar rises to its highest level in four weeks on expectations that the Fed’s interest rates will remain high.
  • The Mexican peso is devalued due to fears over the possible approval of the reforms announced by Andrés López Obrador.

The USD/MXN has jumped this Monday to new highs not seen since March 2023 at 18.65 after starting the day around 18.22.

López Obrador’s announcement on Friday devalues ​​the Mexican peso

The Mexican president, Andrés López Obrador, announced last Friday that he will do everything possible to approve the 20 reforms that he announced on February 5. The president hopes that these reforms will be approved as of September 1, when the Morena Party is supposed to have a large majority in Congress. Among these reforms, the one that causes the markets the most concern is the one related to the country’s Judicial Branch.

On the other hand, Mexico today published its international traveler figures for the month of April, showing that 6,755,413 visitors entered the country, reaching an increase of 10.9% year-on-year. Visitor spending amounted to 2,703.3 million dollars, 3.0% compared to the same month last year.

Tomorrow the country’s industrial production data will be published, which is expected to rise 4.6% annually in April after falling 3% in March.

US Dollar advances on expectations of delay in first Fed rate cut

Friday’s strong non-farm payrolls employment data and a larger-than-expected increase in U.S. wages led the dollar higher late on Friday as investors interpreted these numbers as causing the dollar to rise. Federal Reserve to keep interest rates high for longer.

The Dollar Index (DXY) has opened the week hitting a four-week high of 105.39. CME Group’s FedWatch tool now gives a 49.2% chance that Federal Reserve interest rates will remain unchanged in September. For the November meeting, that probability decreases to 35.1%, so the market expects that it could be the month chosen for a first rate cut.

This week, operators will be very attentive to two events that could generate strong movements in the Dollar, May inflation and the Fed’s interest rate decision.

USD/MXN Price Levels

The bullish trend prevails in the pair on one-hour and four-hour charts. With USD/MXN trading at the time of writing above 18.44, gaining 0.30% on the day, a further rise will find initial resistance at the psychological barrier of 19.00. Above, expect the March 2023 top at 19.23.

On the downside, the main support is in the 18.00 region. Further down, expect the 100 moving average at 17.88, before a drop to the key 17.00 area can be expected.

The 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. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling 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: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of 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 into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 usually leads to a weakening of the US Dollar.

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

Source: Fx Street

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