USD/MXN analysis amid the Banxico and Fed divergence

The USD/MXN exchange rate continued rebounding this week after the latest Banxico interest rate decision. It has risen for four straight days and is nearing the year-to-date high of 19.0.

Fed and Banxico decision

The USD/MXN pair has bounced back in the past few days after it became clear that the Federal Reserve will maintain a hawkish tone as inflation remains at an elevated level.

In its last monetary policy meeting, the bank estimated that the first rate cut will happen later this year if only inflation continues falling. 

Therefore, the upcoming personal consumption expenditure (PCE) report will be important for the pair. The average estimate among analysts is that the headline PCE dropped slightly to 2.6% while the core PCE 2.7%. 

If these analysts are correct, it will mean that inflation is not falling as fast as it did in 2023. It will also be a sign that the figure is not nearing its 2% target, which could lead to more hawkish Fed. 

The USD/MXN pair also rose after the Mexican Central Bank decided to leave interest rates unchanged at 11% on Thursday. It did that as the country’s inflation remained steady and as the peso volatility continued. 

The decision came a few months after the Banxico became the first central bank in Latin America to start cutting interest rates. Since its first cut, however, inflation has crawled back again, reaching a high of 4.69% in May. 

Analysts now expect that the Mexican Central Bank will restart cutting rates in August, making it dovish vs the hawkish Fed. In its decision, the bank said:

USD/MXN technical analysis

USD/MXN chart by TradingView

The daily chart shows that the USD to MXN exchange rate has bounced back after bottoming at 17.86 on June 24th. It has remained above the 50-day and 25-day Exponential Moving Averages (EMA).

The pair was trading at 18.46, its highest point in October last year. At the same time, the Relative Strength Index (RSI) has pointed upwards while the MACD has remained above the neutral point.

Therefore, the USD/MXN pair will likely continue rising as buyers target the key resistance point at 19, which is about 2.67% from the current level.