USD/MXN falls due to the cooling of inflation in Mexico and the decision of the Fed

• The Mexican Peso gains momentum after Mexico’s July CPI beat estimates and rose 4.79% yoy.
• S&P Global data suggests a rebound in US manufacturing activity, softening the impact of the falling service sector PMI.
• The future path of the USD/MXN depends on the next Fed policy meeting, with possible hawkish comments threatening to push it beyond the 17.00 mark.

He USD/MXN erased last Friday’s gains amid a dump of data from the United States (US) and Mexico, bolstering the emerging markets currency, while the Mexican Peso (MXN) rose after an inflation report. At the time of writing, the USD/MXN pair was trading at 16.8277 after reaching a daily high of 17.0091.

Markets anticipate the Fed’s decision amid a rebound in US manufacturing activity and mixed economic data

As mentioned above, the National Institute of Statistics, Geography and Informatics, known as INEGI, revealed that the mid-July Consumer Price Index (CPI) in Mexico rose 4.79% year-on-year, above estimates of 4.7%, but below the previous reading of 5.18%. As for the underlying CPI, the data stood at 6.76% year-on-year, above forecasts of 6.73%, although it fell from the previous 6.91%.

With Banco de México, also known as Banxico, deciding to hold rates twice after peaking at 11.25%, the data could spark a turnaround if core inflation stickiness continues to be an issue preventing inflation from reaching Banxico’s plus/minus 3% target. A source quoted by Reuters commented: “The increase in the services component was due “mainly to the increase in air fares and the tourist package”.”

In the US, S&P Global revealed that manufacturing activity improved from 46.3 in June to 49 in July, beating estimates. This cushioned the fall in services, whose PMI fell to 52.4 from 54.4 last month. Consequently, the composite PMI index fell to 52 in July from 53.2 in June and slowed to its lowest level in five months, reflecting the impact of the US Federal Reserve’s (Fed) 500 basis point tightening.

On Tuesday, the Fed will kick off its two-day policy meeting. Market participants expect the US central bank to raise rates 25 basis points, but as most economists expect, that would be the last hike; hawkish comments from the Fed Chair could lift USD/MXN towards the 17.00 mark and beyond. Otherwise, a dovish stance and interest rate differentials favor the MXN as the carry trade prolongs EM FX gains. Therefore, a further drop in USD/MXN is expected.

USD/MXN Price Analysis: Technical Perspective

The USD/MXN daily chart favors a further decline, as today’s price action, along with last Friday’s, is forming a bearish engulfing pattern, warranting further decline. Unless Wednesday’s Fed decision surprises markets with a hawkish rate hike, USD/MXN could challenge the October 2015 daily low of 16.3267, followed by 16.00. But first, the USD/MXN must fall below 16.5000. Conversely, the USD/MXN could threaten the 20-day EMA at 16.9567, followed by the 17.0000 figure. A break of the latter would expose the 50-day EMA at 17.2269.