The Mexican peso is firing on all cylinders and is on the cusp of more gains in the coming weeks. The USD/MXN exchange rate was trading at 19.38 on Thursday, down by 8.5% from its highest point this year. This article explains why the pair has more downside to go.
USD/MXN technical analysis
The daily chart shows that the USD/MXN exchange rate has been in a strong downtrend in the past few months. It has dropped from a high of 21.30 in February to 19.35 today. It is also hovering at its lowest level since October last year.
The USD/MXN pair has formed a death cross pattern as the 50-day and 200-day Exponential Moving Averages (EMA) are about to make a bearish crossover. This pattern is one of the most bearish ones in technical analysis.
For example, the pair surged by over 13% after it formed a golden cross pattern in July last year. A golden cross is the opposite of the death cross pattern.
The USD/MXN pair has also formed a rounded top or the inverted saucer pattern. This pattern happens when the price rises steadily, then slows, and then starts falling gradually. It is often the first part of an inverse cup and handle pattern.
The pair has moved to the 38.2% Fibonacci Retracement level at 19.38, while the Relative Strength Index (RSI) and the MACD are moving downwards.
Therefore, the pair will likely continue falling as sellers target the next key support at 18.20, the 61.8% Fibonacci Retracement level. A move above the psychological point at 20 will invalidate the bearish outlook.
USD/MXN chart by TradingView
The bullish case for the Mexican peso vs US dollar
There are a two reasons why the Mexican peso may continue rising against the US dollar. First, the US dollar index is in a strong downward trend, and has formed an inverse cup and handle pattern, pointing to more downside in the coming months.
Second, a US court ruled against most of Donald Trump’s tariffs against other countries. The ruling means that most tariffs against Mexico will be removed, even though some will remain.
This means that the Mexican economy will likely do better than expected because of the volume of goods between the two countries. This means that the Mexican central bank may revise its economic forecasts again. In a statement on Wednesday, the bank slashed its economic growth forecast for next year. It expects that the economy will grow by just 0.1% this year, lower than the previous estimate of 0.6%. It then sees the economy growing by 0.9% next year from 1.8% previously.
Next catalysts for the USD to MXN exchange rate
The next key catalysts for the USD/MXN exchange rate will be the upcoming release of Banxico’s minutes of the last monetary policy meeting. These minutes provides more information about what to expect in the next ones.
The other key data to watch will be the second estimate of the US GDP data and the personal consumption expenditure (PCE) report. Economists expect the data to show that the US economy contracted by 0.4% in Q1.
The PCE report will likely show that the US inflation continued falling in April as the impact of Trump’s tariffs started.
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