The Mexican Peso (MXN) is strengthening against the US Dollar (USD), thanks to higher-than-expected inflation rates in mid-May. This development has caused a reassessment of when Banxico might cut interest rates, boosting demand for the Peso and pushing the USD/MXN exchange rate below its 20-day Simple Moving Average (SMA), currently around 19.3096. In the US, economic worries are impacting the Dollar’s value, leading to a weaker USD due to a credit rating downgrade and rising concerns. Even though US inflation aligns with the Federal Reserve’s 2% target, the “One Big Beautiful Bill” has raised concerns about budget deficits, making credit risks seem higher.

Potential Bearish Pressure

The USD/MXN may experience more bearish pressure as it hovers around 19.3096. A drop below 19.30 could indicate lower support levels. The Relative Strength Index (RSI) hints at possible further losses unless the price recovers above the 10-day and 20-day SMA levels at 19.46. Interest rates play a crucial role in currency values. Higher rates tend to strengthen a currency by attracting global investors. They also affect gold prices since rising rates make assets that don’t earn interest less appealing. The Federal Reserve sets the Fed funds rate, which influences market expectations and financial behaviors. The rise in Mexican inflation for mid-May has led to reconsideration of when the central bank may cut rates. This change has made the Peso more appealing recently, attracting investors seeking higher yields that are expected to last longer. Consequently, the Peso has gained strength against the US Dollar, with the exchange rate dropping below its 20-day Simple Moving Average, currently around 19.31. At the same time, concerns from Washington are impacting the Greenback. While US inflation numbers have been mostly stable, deeper issues are emerging. Notably, a downgrade of the US credit rating has increased worries, especially regarding growing fiscal deficits. This significant budget bill has raised alarms about fiscal sustainability, contributing to perceived credit risk. This situation has diminished the Dollar’s appeal, particularly when its safe-haven status is less reliable.

Technical Analysis of the Peso

From a technical standpoint, Peso bulls have an advantage. If the rate stays below 19.30, near-term pressure will increase. There’s little clear support until reaching around 19.20, which traders might target if the trend continues downward. The RSI indicates further weakness in the pair, suggesting that downside momentum could increase unless the price rises above 19.46, aligning with the 10- and 20-day SMA. Without a stabilizing move above these levels soon, there’s a risk of further declines. Broader macroeconomic factors will remain influential. For instance, interest rate differences are crucial for deciding currency movements. When markets expect higher domestic rates, like in Mexico’s case, it can draw in capital looking for yield benefits. On the other hand, higher rates create a challenging environment for assets like gold, making them less attractive since they don’t yield returns. In the US, the Fed funds rate continues to be a key indicator, shaping expectations and actions in global financial markets. As thoughts around central bank policies evolve, driven by inflation, labor data, and political factors, traders have plenty to analyze for short-term positioning. Create your live VT Markets account and start trading now.

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