The USD/MXN exchange rate has remained in a consolidation phase in the past few months. It has remained inside the important support and resistance level at 18.20 and 18.76 since September.
Banxico Interest Rate Cuts as Economy Slows
The USD/MXN pair has remained inside a narrow range as investors focused on the actions by the Federal Reserve and Banxico interest rate decisions.
Mexico’s central bank has been in a rate-cutting cycle in the past few months as the country’s economy has slowed substantially because of Donald Trump's policies.
It slashed interest rates by 0.50% this month, bringing the benchmark rate to 7.25%, much lower than its January levels of 8.50%.
The rate cut came as data showed that the economy shrunk in this quarter of this year. It contracted by 0.30% in this quarter from Q2 and by 0.2% from the same period last year. As such, there is a risk that the country will enter a technical recession if it contracts in the fourth quarter.
Mexico’s economy has contracted mainly because of the industrial sector, which includes areas like mining, construction, and manufacturing. These sectors were offset by growth in the agricultural, livestock, and fishing.
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Analysts now believe that the central bank will cut interest rates again in December, a move it believes will help to boost the economy.
Meanwhile, in the United States, divisions have emerged among Federal Reserve officials, with some officials warning on more interest rate cuts. Their fear is that more cuts will drive inflation higher.
On the other hand, some Fed officials like Stephen Moran, Christopher Waller, and James Williams have suggested that more cuts are necessary to safeguard the labor market. This means that the decision to cut or leave rates unchanged in the next meeting will depend on two officials.
Looking ahead, the next catalysts for the USD/MXN pair will react to some key macro data, including the upcoming US consumer confidence and pending home sales data.
USD/MXN Technical Analysis
The daily timeframe chart shows that the USD/MXN exchange rate has remained inside a narrow range in the past few months. It has remained inside the support at 18.20 and the resistance at 18.75.
This consolidation has pushed the Average True Range (ATR) lower, a sign of low volatility. It is also hovering at the 50-day and the 25-day Exponential Moving Averages.
Therefore, the most likely scenario is where the pair remains inside this range this week. More extreme moves will be confirmed if it moves above the resistance at 18.76 or the support at 18.20.
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