USD/MXN: Bank of Mexico interest rate decision preview

The USD/MXN price is bouncing back ahead of the closely watched Bank of Mexico interest rates decision that will come out on Thursday. The pair is trading at 20.17, which is 1.80% above the year-to-date low of 19.80. 

Bank of Mexico interest rate decision

The Bank of Mexico will conclude its two-day monetary policy meeting and deliver its rate decision during the American session. Economists polled by Bloomberg expect the central bank to leave the interest rate unchanged at 4.0%. 

This is in contrast to what other emerging market central banks have done. For example, the Brazilian and Turkish Central Banks have already raised interest rates two times. Bank of Russia has made one rate hike to curtail inflation.

While inflation has risen in Mexico, policymakers believe that the rise is temporary. For one, they are being compared by 2020, when they fell sharply as the country moved into lockdown. An analyst at Bloomberg said:

“Mexico’s central bank is likely to hold the key interest rate at 4% on Thursday. Policymakers may sound a more cautious tone than in the last gathering due to high and resilient inflation through April.

The USD/MXN has been under pressure recently as investors priced in a stronger recovery of the country’s economy. The country has benefited from higher crude oil prices and the fact that it is one of the biggest US trading partners. As such, a substantial amount of America’s stimulus funds have flown into the country. Further, data from Mexico like retail sales, industrial production, and inflation have been better than expected.

The USD/MXN pair has risen because of the overall strong US dollar. The dollar index has risen by more than 0.10% after the strong US inflation data. The data showed that prices rose by 4.2% in April, the fastest growth since 2008. Therefore, investors hope that the Fed will start tightening earlier than expected. Other emerging market currencies like the Turkish lira and South African rand have also declined.

USD/MXN technical forecast

The four-hour chart shows that the USD/MXN price has bounced back after falling to a low of 19.800 in April. The pair is at the 78.6% Fibonacci retracement level. It is also slightly below the important resistance at 20.3296. At the same time, the price is moving above the Ichimoku cloud. The 25-day and 50-day Exponential Moving Averages have already made a bullish crossover. Therefore, the pair may keep rising as bulls target the 61.8% retracement leve at 20.50.