Mexican Peso drops as risk aversion underpins the US Dollar
- The Mexican Peso dives as US data beats reinforce Greenback comeback.
- Logan and Schmid keep Fed tightening risks firmly alive.
- USMCA talks could cushion Peso if progress continues.
The Mexican Peso depreciated by about 0.30% on Thursday as market participants turned risk-averse amid an escalation of the Middle East conflict, which has driven energy prices higher. Also, a round of positive US data triggered a U-turn in the overall trend, which could open the door to a recovery in the Greenback. At the time of writing, the USD/MXN trades at 17.43 after reaching a low of the day (LOD) of 17.37.
USD/MXN rebounds as Oil shock, US data boosts the USD
Strikes between the US and Iran continued, fueling fears that a prolonged conflict might trigger a second wave of inflation, due to high Oil prices. Consequently, the Greenback stages a comeback, bolstered by high US Treasury yields, as the 10-year T-note yields 4.569%, up 2 basis points.
Consequently, the US Dollar Index (DXY), which measures the performance of the American currency against other six, is up 0.27% to 100.76.
US data was positive, with Retail Sales up 0.2% MoM in June, below May’s 1% growth—mainly due to higher gasoline prices. Control Group Retail Sales, used for GDP, slowed from 0.8% to 0.5%, as expected. Other data revealed that Initial Jobless Claims for the week ending July 11 were 208K, below forecasts of 217K.
Fed officials turn hawkish
Fed Regional Bank Presidents Lorie Logan and Jeffrey Schmid crossed the wires and were hawkish. Logan from the Dallas Fed calls for a slightly higher policy rate to balance the outlook and risks. Schmid from Kansas City notes the labour market is stable but remains concerned about persistent inflation across many goods and services.
Mexico-US bilateral talks continued to progress
In Mexico, the economic docket was absent, yet negotiations between Washington and Mexico continued.
The US Trade Representative, Jamieson Greer, commented that formal trade talks with Mexico were progressing. Greer said that “So, it's going well with the Mexicans. They're quite pragmatic,” but added that “our trade deficit with Mexico really is a challenge. It really is a problem.”
Next week, US and Mexican officials will meet for a third round of formal bilateral USMCA negotiations in Mexico City. A positive outcome in trade negotiations could underpin the Mexican Peso, which is poised to weaken further as the interest rate differential is set to narrow.
The Bank of Mexico (Banxico) is expected to keep interest rates unchanged at 6.50%. Conversely, the swaps market expects the Federal Reserve to increase rates by 25 basis points, which would reduce the differential to 250 basis points.
USD/MXN Price Forecast: Technical outlook
In the daily chart, USD/MXN trades at 17.4309, holding slightly above the cluster of simple moving averages (SMA) around 17.3786, which acts as near-term support and keeps the broader tone mildly constructive. The pair is still capped by a descending resistance trend line drawn from 18.1651, whose latest reaction high at 17.5456 marks the first topside barrier, while the Relative Strength Index (14) around 49 suggests momentum is broadly neutral and consistent with a consolidative bias rather than a directional breakout.
On the topside, initial resistance is seen at the recent trend-line reaction near 17.5456, ahead of a more distant structural cap associated with the longer-term downtrend line, where the latest resisted close stands near 18.1200. On the downside, immediate support is provided by the multi-period SMA zone at 17.3786, and as long as USD/MXN stays above this moving-average floor, dips would likely remain shallow within the prevailing range.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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