Mexican Peso risks ending its uptrend against USD

• The Mexican Peso is at risk of a reversal versus the USD following the release of the FOMC meeting minutes. 
• The minutes revealed a reluctance to lower interest rates, how the labor market was key, and the possibility of raising rates. 
• USD/MXN threatens to reverse the trend after completing a bullish reversal over the last two days. 

The Mexican Peso (MXN) steadies itself on Thursday after two days of declines against the US Dollar (USD), as traders stand back ahead of a slew of data out of Mexico. 

The USD’s fightback gained momentum on Wednesday after the release of the Federal Reserve (Fed) meeting Minutes showed policymakers are reluctant to lower interest rates amid persistent inflationary pressures. 

Their view that interest rates should remain higher for longer supported USD since higher interest rates attract greater foreign capital inflows.

USD/MXN is trading at 16.65 at the time of writing, whilst EUR/MXN is trading little changed at 18.03 and GBP/MXN is up due to Pound Sterling strength at 21.19. 

Mexican Peso stalls in its uptrend post FOMC Minutes

The Mexican Peso lost more ground against the US Dollar on Wednesday, following the release of the Federal Open Market Committee (FOMC) meeting Minutes for the April 29-May 1 policy meeting. 

The summary of discussions revealed that although policymakers expected price pressures to ease eventually, they had not fallen quickly enough and therefore the current policy rate of 5.25% - 5.50% should be maintained “at least until September,” according to FXStreet. 

The strength of the labor market emerged as a key factor determining future policy.  

The possibility of raising interest rates in order to bring inflation down in a sustainable manner was also discussed as an option. This added a new more hawkish element to the proceedings and echoed similar discussions in the Reserve Bank of Australia’s (RBA) meeting minutes. 

The Minutes catalyzed a rally in the US Dollar, fueling a consequent rise in USD/MXN. 

Mexican Day of the Data

Mexican Peso traders will now be preparing for a slew of economic data releases for Mexico scheduled to come out at 12:00 GMT on Thursday. 

These include the final estimate of Mexican Gross Domestic Product (GDP) in Q1,  Half-month Inflation for May and Economic Activity data for March. 

Then at 15:00 GMT the Minutes of the Bank of Mexico’s (Banxico) May policy meeting will be released and could lead to further volatility. 

In the US, the release of Purchasing Manager Index (PMI) data for May at 13:45 GMT could impact the US Dollar.  

Technical Analysis: USD/MXN validates bullish reversal day

USD/MXN – or the number of Pesos that can be bought with one US Dollar – edges higher on Thursday after forming a bullish reversal day which gained confirmation from the bullish close on Wednesday (shaded rectangle on the chart below). 

USD/MXN Daily Chart 

The reversal pattern was validated by Wednesday’s bullish close and could be a sign the trend may reverse. A break on a closing basis above the green down trendline would be required to confirm a reversal of the short-term trend.

On Tuesday USD/MXN reached the conservative target, at 16.54, for the breakdown out of the range that formed from mid-April to early May. The conservative estimate is calculated as the 0.618 Fibonacci ratio of the range's height extrapolated lower. 

The pair remains in a downtrend and there is still a high risk of further bearishness taking it lower. The next downside target is 16.34, the full height of the range extrapolated lower. A break below the Tuesday low of 16.53 would signal a continuation of the downtrend. 

Given the medium and long-term trends are also bearish, the odds further favor more downside.