USD/MXN Falls On Dovish Fed and U.S. GDP Knowledge Miss

MEXICAN PESO OUTLOOK:

• The Federal Reserve left its financial coverage unchanged and indicated that the establishment remains to be a methods away from contemplating withdrawing lodging
• The central financial institution dovish tone weighed on the U.S. greenback and boosted rising market currencies such because the Mexican peso
• The greenback’s detrimental bias was exacerbated on Thursday by weaker-than-expected GDP in the USA

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The Mexican peso strengthened reasonably on Thursday, supported by broad-based U.S greenback weak spot and improved threat urge for food, mirrored in new all-time highs in fairness markets. On the New York shut, the USD/MXN retreated 0.3% to 19.85, falling for the seventh consecutive day and touching its lowest stage since mid-July.

EM FX appeared to have benefited from detrimental greenback sentiment following the Federal Reserve financial coverage choice and a few disappointing macroeconomic knowledge earlier at the moment.

On the primary level, the Consumed Wednesday stored rates of interest and its QE program unchanged, dismissing excessive inflation as transitory and noting that the financial system has moved nearer to the targets set for decreasing asset purchases. The restoration’s upbeat evaluation, nonetheless, didn’t set off a constructive response within the dollar, because the FOMC chairman was fast to level out that the “additional substantial progress” criterion to scale back lodging has not but been met. Powell’s remarks led merchants to speculate that the tapering announcement will come not in late summer time or early fall, however in direction of the tip of the 12 months, a truth which will preserve nominal yields depressed near-term.

The greenback’s bearish tone carried over from the day before today was exacerbated by the U.S. gross home product outcomes launched this morning. In line with the report, second quarter GDP grew at an annualized charge of 6.5%, nicely under the 8.4% forecast by the market. Whereas the worse-than-expected headline determine might be attributed partly to a pointy decline in inventories, many traders argue that cooling growth will immediate the FOMC to be extra affected person in withdrawing stimulus.

General, whereas the Fed’s dovish financial coverage might be seen as a bullish catalyst for rising market currencies with excessive carry, such because the Mexican peso, considerations a few new wave of COVID-19 could dent the yield-seeking commerce and restrict their appreciation potential. Trying particularly at USD/MXN, which means the pair has room to proceed to maneuver decrease in step with the downtrend, however value may quickly reverse to the upside if the detrimental headlines from the coronavirus intensify and traders begin to fear in regards to the world restoration. Evidently, fears of a slowdown, justified or not, can set off volatility and drive demand for safe-haven currencies.

USD/MXN TECHNICAL ANALYSIS

USD/MXN is at the moment testing a key help space close to the 19.85 mark outlined by a short-term ascending trendline in play since early June. If the pair manages to drop and shut under this stage decisively, sellers may drive the alternate charge in direction of the 2021 low within the 19.55 area. A transparent break right here may even see the following help on the 19.00 psychological mark.

On the flip aspect, if USD/MXN phases an sudden rebound, the primary resistance seems on the 20.20 zone (200-day transferring common). If this technical wall is taken out, shopping for momentum may propel value in direction of the 20.75 area, the place the June excessive converges with a long-term bearish trendline.

USD/MXN TECHNICAL CHART

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—Written by Diego Colman, DailyFX Market Strategist