Mexican Peso reaches two-year high despite weaker Retail Sales

The Mexican currency appreciates to levels last seen in May 2024 as the USD/MXN falls to a two-year low as the US Dollar tumbles even though business activity in the services sector improved. The exotic pair trades at 16.92, down 0.22% for the week and 0.50% for the week.

USD/MXN weakens on soft US Dollar and carry support

On Friday, sentiment improved as a tailwind for the emerging market currency, which is also supported by the carry trade, due to a 275-basis-point interest rate differential in favour of the Mexican Peso against the Greenback. The latter, according to the US Dollar Index (DXY), which measures the performance of the buck versus six developed currencies, ended flat at 98.84 for the day but down over 0.80% for the week.

Mexican Retail Sales fell short of estimates for a 0.1% expansion, shrank -0.2% MoM in June, improved compared to May’s -0.6% contraction. In the twelve months to June, sales rose from 1.6% to 2.7%, but missed forecasts of a 3.1% jump.

On Thursday, the minutes of the Bank of Mexico (Banxico) revealed that it remains cautious about rates, despite recognising that inflation risks are tilted to the upside. Banxico’s board revealed that the current policy stance is appropriate and mentioned that the “escalation of the Middle East conflict could negatively affect global economic activity.”

In the US, business activity in the services sector improved according to S&P Global, crushing estimates in August. However, manufacturing activity slowed, even as it expanded at a moderate pace. The report showed that factory prices are feeling the strain of the US-Iran war, disrupting commodity flows and pushing energy prices higher.

Geopolitics are grabbing the market’s attention. The Iranian President said that it was time to end the war, but the Iranian Navy commander separately warned that a “historic lesson” was coming for the enemy. 

For the next week, the Mexican economic docket will feature inflation data for the first half of August, GDP for the second quarter and the Current Account. In the US, traders turn to Treasury Secretary Bessent announcing Iranian sanctions on Monday, the US PCE report, BLS prelim benchmark revisions, and Fed Chair Warsh at Jackson Hole.

USD/MXN Price Forecast: Technical outlook 

In the daily chart, USD/MXN trades at 16.9206, extending its decline below the recent range and keeping a bearish near-term bias. Spot holds beneath the clustered simple moving averages (SMA) pack, with the latest triple SMA reading around 17.3393 acting as overhead resistance, while a nearer descending resistance trend line from 18.1651 comes in around 17.0838 and reinforces the cap on rebounds. The Relative Strength Index (14) at 27.3 is slipping into oversold territory, which hints at stretched downside conditions but does not yet signal a clear recovery.

On the topside, initial resistance is seen at the downward resistance trend line from 18.1651 near 17.0838, ahead of the triple SMA barrier around 17.3393, while a broader descending resistance line drawn from 21.0808 sits much higher near 18.1200 and marks a more distant hurdle. With no nearby support levels defined by moving averages or trend lines below the current price, any bounce from the 16.90 region would likely be corrective unless the pair can reclaim the 17.0838 area and then challenge the SMA cluster around 17.3393.