USD/MXN: Peso waits for Mexico central bank decision

The Mexican economy is firing on all cylinders as the country benefits from its proximity to the United States. As a result, the USD/MXN exchange rate has dropped this year and is hovering at the lowest level since April 2016. It has plunged by over 33% from the highest level during the pandemic.

Mexico economic growth

The world is going through major shifts and realignment as tensions two biggest economies in the world rise. Following the Covid-19 pandemic and Russia’s invasion of Ukraine, most companies started changing their supply chains.

Today, many American companies have started moving to Mexico for three main reasons. First, Mexico is extremely close to the United States. Second, the two countries have a free trade agreement, meaning that most imports are not taxed.

Third, the cost of doing business in the country is relatively cheaper than in the US. While Mexico’s wages are higher than in China, many companies are saving money through automation. 

Recent data has shown the strength of the Mexican economy. For example, numbers published on Tuesday showed that the country’s retail sales jumped by 1.5% on a MoM basis and by 3.8% on a YoY basis. This increase was higher than the median estimates of -0.3% and 2.5%, respectively.

There will be two main catalysts for the USD/MXN pair this week. First, Jerome Powell, the Federal Reserve chair, will be grilled in Congress. He will likely talk about the state of the economy and the actions that the bank will take.

Second, the Mexican central bank will meet on Thursday. With the country’s inflation easing, there is a likelihood that the bank will decide to leave interest rates unchanged at 11.25%. If this happens, it will be the second straight month that the bank has not hiked rates.

USD/MXN technical analysis

USD/MXN chart by TradingView

The USD to MXN exchange rate has been in a strong bearish trend in the past few months. On the weekly chart, the pair has formed a head and shoulders pattern. It recently moved slightly below the neckline of this pattern at 17.35.

At the same time, the pair has moved comfortably below all moving averages while the Relative Strength Index (RSI) has dropped to the oversold level. The Average Directional Index (ADX) has risen to 26, signaling that the trend is strong. Therefore, the USD/MXN pair will likely continue falling as sellers target the next key support level at 15.