USD/MXN falls below 18.0000 as Mexican inflation cools amid a soft US Dollar

The USD/MXN loses its appeal and drops below 18.0000, even though buyers eyed higher ceilings at around the 20-day EMA. A risk-off impulse keeps the emerging market currency fluctuating, although the US Dollar (USD) weakened. At the time of writing, the USD/MXN is exchanging hands at 17.9762.

USD/MXN seesaws as sentiment fluctuated: while US and Mexican central bank divergence could weigh on the MXN

After bottoming around the 17.9000 area in the last week, the USD/MXN pierced the 18.00 area before retracing and turning negative on Monday. That after the latest round of mixed US economic data and Mexican inflation slowing in the first half of April suggested that central bank divergence could weigh on the MXN.

Last Friday, the US Federal Reserve Governor, Lisa Cook, expressed that monetary policy is entering an uncertain phase and suggested that headwinds from the banking sector could impact the outlook for rising interest rates. She also anticipates a deceleration in March PCE inflation, though she added that core inflation remains sticky.

The agenda of US economic releases featured the March Chicago Fed National Activity Index (CFNAI), with figures plummeting to -0.19, above estimates of -20, unchanged from February’s reading. Despite the previously mentioned, the three-month moving average ticked up to 0.01%, signaling that the US economy continues to grow slower.

Of late, the Dallas Fed Manufacturing Business Index in April plummeted to -23.4, well below the -11.00 estimated, as the survey showed that perceptions of broader business conditions worsened, according to the poll.

On the Mexican front, annual headline inflation rose 6.24% through mid-April, its lowest level since October 2021. Core inflation stood at 7.75% for the same period. Even though the Bank of Mexico’s (Banxico) target is 3%, expectations that the central bank completed its tightening cycle have arisen.

Aside from this, investors’ odds that the Federal Reserve will hike rates by 25 bps are at 90%, according to the CME FedWatch Tool. However, traders estimate that the US central bank “could” cut rates by the September meeting, followed by another one in December.

USD/MXN Technical Analysis

The USD/MXN continues to track the 20-day EMA as its dynamic resistance for the latest couple of weeks. Although the USD/MXN printed a daily high at around 18.0480 shies of testing 18.0500, it retreated back below the 18.00 mark as it headed for testing the YTD lows at 17.8968. Downside risks emerged below 18.0000, with key support levels at 17.9142, before the abovementioned YTD low. Conversely, buyers reclaiming 18.0000 will pave the way for the USD/MXN to test the 20-day EMA at around 18.1200 before rallying to the 50-day EMA at 18.3310.