USD/MXN on the Lookout for Banxico Meeting and Fed Commentary Post NFP

USD/MXN Forecast: Bearish

USD/MXN has kept relatively stable from where I left it last week, with a few attempts of breaking to the downside and limited upside momentum. Even after the NFP data came out stronger than expected and the Dollar picked up some bids along the way, the pair has seen one of its most stable weeks of the past two months.

Now his could either be a sign of stable repositioning and balanced forces, or investors could have outright lost interest in USD/MXN this week. Looking at the volume data, it seems to be more of a case of the first. It wouldn’t be the first pair to be clouded with indecision after some relatively busy weeks, so the question now is where do we go from here.

This strong employment reading seen on Friday is the final piece in the Fed policy puzzle that has been a long time in the work. With inflation having reached the conditions needed to start being less accommodative a while ago, it was just a case of the jobs market showing the same progress, and it had been resisting for a few months. Now that over 800k jobs have been added in July, I would expect markets to become more bullish on the likelihood of the Fed announcing tapering at the Jackson Hole symposium at the end of this month, with the US Dollar growing more bullish alongside it. If they don’t, that will be a big disappointment, and a kick in the gut for the Dollar.

On the Peso side, Banxico will be holding its August interest rate decision meeting on Thursday. Market expectations have been growing for the bank to rise the key rate by 0.25 basis points to 4.5%, which would be a consecutive rise after June’s 0.25 bps rise to 4.25%. If so, this would likely lift the Peso a little bit and would make the Mexican currency more attractive for those investors seeking carry trade advantages. The US CPI and PPI data out this coming week will also be something to watch out for as it may move the Dollar and therefore make USD/MXN more volatile.

USD/MXN Daily chart

Despite the attempt at a bullish breakout on Wednesday, USD/MXN has been capped at the 20 pesos mark which is a good sign that sellers are firmly back in place. This is also an area where the 20, 50 and 100-day SMA are all converging, making it even more significant as a resistance going forward. If it holds going into this week, then sellers will be looking for a break below 19.80 to consolidate momentum further as the stochastic oscillator begins to show overbought conditions.

Fibonacci Confluence on FX Pairs

— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin