USD/MXN drops below 18.8000 on risk appetite, offered US Dollar ahead of the FOMC

The Mexican Peso (MXN) strengthens against the US Dollar (USD) courtesy of an upbeat sentiment amongst investors after Wall Street’s three major indices opened with gains. Therefore, the USD/MXN pair extended its losses below Monday’s low of 18.7857, though the 50-day EMA at 18.6820 capped the US Dollar losses. At the time of writing, the USD/MXN is trading at 18.7673, down 0.24%.

USD/MXN drops on risk-appetite, traders eyeing Fed’s decision

Sentiment remains upbeat. The financial markets narrative changed from inflation to a banking and credit crisis after the failure of two banks in the United States and another at the brisk of default. That has shifted global central banks’ interest rate increases expectations, with traders foreseeing that the Fed could cut rates in the year.

Money market futures expect the Fed to hike 25 bps, with odds at 83.4%, compared to Monday’s 73.8%. Nevertheless, uncertainty around how Fed Chair Jerome Powell’s press conference will go could rock the boat in the financial markets.

Societe Generale economists foresee a 25 bps rate hike

Delving a little deep into Jerome Powell’s press conference, Societe Generale analysts said, “the language around inflation and guidance on interest rates will take precedence over the next 48 hours. The Fed must err on the side of caution, and this means toning down the hawkish narrative until confidence in bank liquidity has been restored. SG economists forecast a +25bp hike, while the market is pricing in nearly 26% probability of a pause.”

Given the backdrop, the USD/MXN might consolidate around current exchange rates. The lack of economic data from Mexico would keep traders leaning into the dynamics of the US Dollar.

The US Dollar Index continues to edge lower, down 0.17%, at 103.132. US Treasury bond yields responded to expectations for a rate hike, with 2s and 10s up 16 and 9 bps each, at 4.148% and 3.579%, respectively.

Of late, Existing Home Sales in the United States in February rose 14.5% MoM, above estimates of 5%, the biggest increase since July 2020, and finished one full year of declines in sales.

USD/MXN Technical analysis

After failing to hold to gains above 19.0000, the USD/MXN resumed its downtrend, clearing the 100-day Exponential Moving Average (EMA) support at 18.9846. However, it should be said that the USD/MXN moved from trading within the low 18.00s to 18.10s towards the 18.60-18.90s area. Oscillators like the Relative Strength Index (RSI) and the Rate of Change (RoC) are still bullish, but RSI’s slope shifted downwards, suggesting that buying pressure is waning.

If the USD/MXN resumes upwards, the first resistance would be the 100-day EMA at 18.9848, followed by the $19.00. A breach of the latter will expose the weekly high at 19.2327. for a bearish resumption, the USD/MXN needs to crack $18.60, so sellers could have a chance to test the 20-day EMA  at 18.5635 before diving toward $18.00.