USD/MXN forecast after the final Mexico Central Bank rate cut

The USD/MXN exchange rate has come under pressure in the past few months as top emerging market currencies continued to beat the US dollar. It dropped to 17.30 on Friday, down from the year-to-date high of 18.14 as focus shifted to the US non-farm payrolls data and May 7th’s Mexico interest rates decision.

US non-farm payrolls data ahead 

The main catalyst for the USD/MXN exchange rate will be the upcoming US non-farm payrolls numbers, which will come out on Friday.

Economists expect these numbers to reveal that the economy created 60k jobs in April after adding 178k in the previous month. Most of these numbers will likely be in the hospitality industry as businesses prepare for the upcoming World Cup event.

The unemployment rate is expected to remain at 4.3%, while wage growth is expected to remain above 3%.

Still, the reality is that the US labor market is not doing well, as companies complain about the elevated cost of doing business and the ongoing AI integration.

Some large companies have announced layoffs in the past few months. For example, 17,000 Spirit Airlines employees lost their jobs after the company filed for bankruptcy. 

Coinbase is slashing 14% of its workers, while Cloudflare is cutting 1,100 employees. Data shows that tech companies reduced their workers by over 33k in April and this trend will continue. Some of the top jobs at risk are in the software industry as AI tools like Claude can simplify how products are shipped.

These numbers come after last week’s Federal Reserve interest rate decision in which officials decided to leave interest rates unchanged between 3.50% and 3.75%. Officials had a dovish tilt, with most of them focusing on the weak labor market.

The Federal Reserve is contending with the fact that the US is in a stagflation, a period characterized by high inflation and a slow economic growth.

Mexican Central Bank interest rate decision 

The other main catalyst for the USD/MXN exchange rate is the latest Bank of Mexico decision, which came out on Thursday.

The bank has been in a rate cut cycle, with the interest rate falling from 11.25% in 2024 to 6.50% today. Analysts believe that its rate cut this week was the final one during the cycle. Three board members voted to cut, while two of them favored leaving them unchanged.

The bank pointed to the deteriorating economy amid global challenges. Its economy shrank in the first quarter, while inflation dropped modestly during the quarter.

The Banxico interest rate cut has reduced its appeal among carry trade investors as the spread between the US and Mexican rates has narrowed. A carry trade is a situation where investors borrow a lower-yielding currency and invests the cash in a higher-yielding country.

USD/MXN technical analysis

USDMXN chart | Source: TradingView

The daily timeframe chart shows that the USD to MXN exchange rate has crashed from a high of 18.14 on March 20th to 17.30.

It has crashed below all moving averages, a sign that bears remain in control. Also, the pair has moved below the Ichimoku cloud indicator, while the Relative Strength Index (RSI) has tilted downwards.

Therefore, the most likely scenario is where the pair continues falling, potentially to the support at 17.08, its lowest level in February and March this year.

On the other hand, a move above the resistance at 17.58 will invalidate the bearish outlook and point to more gains. This is possible as the pair has formed a double-bottom-like chart pattern.