USD/MXN rises 0.50% and breaks resistance levels due to the strength of the US economy

• US economic data reinforces strong growth, diminishing the chances of rate cuts later in the year.
• The Fed’s hawkish stance strengthens the dollar and pushes USD/MXN beyond critical resistance levels.
• The market is waiting for the Bank of Mexico’s decision on interest rates, in anticipation of a pause in the adjustment cycle.

The USD/MXN rebounds strongly by more than 0.50%, breaking critical resistance levels such as 17.5000 and the 17.6000 zone, in the midst of a light economic calendar on the Mexican front, awaiting the decision of the Bank of Mexico (Banxico ). The latest round of economic data from the United States (US) showed the economy to be robust, while Fed members continued to support rate hikes. The USD/MXN pair is trading around 17.6710 after reaching a low of 17.4809.

Banco de México decision looms, US data supports Fed’s hawkish narrative

The upward pressure on the USD/MXN has been supported by the above reasons. US retail sales showed consumer resilience, while industrial production showed signs of recovery on Tuesday. Data on Wednesday showed April Building Permits topped estimates by 1.437 million to 1.416 million, while Home Starts improved from a March drop of -4.5% to 2.2% in April at an annualized rate of 1,401 million.

With the latest data continuing to show signs of strength in the economy, expectations that the Federal Reserve (Fed) will cut rates before the end of the year have been delayed. The odds for two rate cuts in December stand at 40.4%, while the odds for three decrease to 26.9%, CME’s FedWatch tool shows.

Therefore, US Treasury yields reflect the aforementioned recovery and support the US dollar (USD), a tailwind for USD/MXN. The Dollar Index (DXY) is up 0.38% to 102.989 and is about to test the 100-day EMA at 103.187.

As for the Fed, its officials stuck to their hawkish rhetoric, led by Loretta Mester, Thomas Barkin and John Williams. In the more neutral spectrum, the newly appointed Aaron Golsbee and Lorie Logan remain, although both reiterated that rate cuts are not expected.

Aside from this, the debt ceiling discussions showed some improvement, despite the fact that US House Speaker McCarthy continues to claim that the two sides remain estranged. He acknowledged that an agreement could be reached by the end of the week. President Biden announced that there was “a consensus, I think, among congressional leaders that defaulting on debt is simply not an option.”

Even before the meeting began, word broke that President Biden was going to cut his upcoming trip to Asia short and return to Washington on Sunday after the G-7 summit in Japan.

On the Mexican front, USD/MXN traders are watching Banxico’s decision on Thursday, with most analysts estimating that the central bank will pause its tightening cycle.

USD/MXN Price Analysis: Technical Perspective

Despite USD/MXN posting back-to-back bullish sessions, the bias remains bearish. However, today’s jump in the pair brings into play a test of the 20-day EMA, which, if broken, would open the door to test the April 2018 swing low turned resistance at 17.9388. . A break of the latter will expose 18.0000 as the USD/MXN pair recovers from losses earlier in the year. Conversely, a pullback below 17.5000 would open the door for a retest of the year lows around 17.40.