Mexican Peso Outlook: USD/MXN Falls On Dovish Fed and U.S. GDP Data Miss

(MENAFN- DailyFX) MEXICAN PESO OUTLOOK:

• The Federal Reserve left its monetary policy unchanged and indicated that the institution is still a ways away from considering withdrawing accommodation
• The central bank dovish tone weighed on the U.S. dollar and boosted emerging market currencies such as the Mexican peso
• The dollar’s negative bias was exacerbated on Thursday by weaker-than-expected GDP in the United States

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The Mexican peso strengthened moderately on Thursday, supported by broad-based U.S dollar weakness and improved risk appetite, reflected in new all-time highs in equity markets . At the New York close, the USD/MXN retreated 0.3% to 19.85, falling for the seventh consecutive day and touching its lowest level since mid-July.

EM FX appeared to have benefited from negative dollar sentiment following the Federal Reserve monetary policy decision and some disappointing macroeconomic data earlier today.

On the first point, the Fed on Wednesday kept interest rates and its QE program unchanged , dismissing high inflation as transitory and noting that the economy has moved closer to the targets set for reducing asset purchases. The recovery's upbeat assessment, however, did not trigger a positive reaction in the greenback, as the FOMC chairman was quick to point out that the "further substantial progress" criterion to reduce accommodation has not yet been met. Powell's remarks led traders to speculate that the tapering announcement will come not in late summer or early fall, but towards the end of the year, a fact that may keep nominal yields depressed near-term.

The dollar's bearish tone carried over from the previous day was exacerbated by the U.S. gross domestic product results released this morning. According to the report, second quarter GDP grew at an annualized rate of 6.5%, well below the 8.4% forecast by the market. While the worse-than-expected headline figure can be attributed in part to a sharp decline in inventories, many investors argue that cooling expansion will prompt the FOMC to be more patient in withdrawing stimulus.

Overall, while the Fed's dovish monetary policy can be seen as a bullish catalyst for emerging market currencies with high carry, such as the Mexican peso, concerns about a new wave of COVID-19 may dent the yield-seeking trade and limit their appreciation potential. Looking specifically at USD /MXN, this means that the pair has room to continue to move lower in line with the downtrend, but price could temporarily reverse to the upside if the negative headlines from the coronavirus intensify and investors start to worry about the global recovery. Needless to say, fears of a slowdown, justified or not, can trigger volatility and drive demand for safe-haven currencies.

USD/MXN is currently testing a key support area near the 19.85 mark defined by a short-term ascending trendline in play since early June. If the pair manages to drop and close below this level decisively, sellers could drive the exchange rate towards the 2021 low in the 19.55 region. A clear break here may see the next support at the 19.00 psychological mark.

On the flip side, if USD/MXN stages an unexpected rebound, the first resistance appears at the 20.20 zone (200-day moving average). If this technical wall is taken out, buying momentum could propel price towards the 20.75 region, where the June high converges with a long-term bearish trendline.

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---Written by Diego Colman, DailyFX Market Strategist

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