USD/MXN forecast ahead of Mexico Central Bank decision

The USD/MXN price moved sideways as investors waited for the latest interest rate decision by the Mexican central bank. The pair is trading at 20.50, which is a few points above the year-to-date low of 19.57. 

Bank of Mexico interest rate decision

The Mexican economy has had an uneven recovery. To a large extent, the large stimulus package by the United States (US) has helped the country’s recovery. 

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In response to the pandemic, the US has injected more than $6 trillion to the economy directly. The Federal Reserve has also printed trillions of dollars through the open-ended quantitative easing program. This stimulus has helped Mexico, which is one of the biggest of America’s trading partners.

However, the Mexican economy has faced some challenges. For one, the ongoing supply shortages and shipping gridlocks have made it more expensive for manufacturers. At the same time, the pace of job creation in the economy has been relatively slow.

Meanwhile, inflation has surged. The most recent data showed that the country’s inflation rose sharply in October as high energy prices coincided with the supply shortages. Mexico’s inflation was at 6.24% in October and analysts expect that it will rise to 7% in the coming months.

Most analysts polled by Bloomberg expect that the Mexican Central Bank will hike interest rates by about 0.25% from the 4.75%. If analysts are accurate, this will be the fourth interest rate hike this year. The bank has hiked in the past three straight meetings. 

Still, the bank has a tough balancing act to do. While it is battling inflation, higher interest rates could limit the overall recovery by lowering access to capital by both households and businesses. Also, a more hawkish decision could make the Mexican peso more expensive.

The USD/MXN pair is also reacting to the latest US inflation data. The number showed that the country’s inflation surged to the highest level in 30 years.

USD/MXN technical analysis

The daily chart shows that the USD/MXN pair has been in a relatively tight range in the past few weeks. The pair is still about 5.45% below its highest level this year. It has also risen by more than 20% from the highest point last year. The pair is also between the channel shown in red and is above the 25-day and 50-day moving averages. Therefore, the pair will likely remain in this channel after Mexico’s interest rate decision.