The US dollar strengthened against most currencies today thanks to higher-than-expected inflation data.

The US Bureau of Labor Statistics published a slightly higher than expected number for inflation at 3.5%, compared to the forecast of 3.4%. However, last month’s rate of inflation was at 3.2%. This month’s data showed a more significant rise in inflation.

So, it seems inflation is more stubborn than expected and the rate of decline expected might take longer. The market reads this news as a reason for which the Federal Reserve is likely to hold changing its monetary policy and start the long-awaited cycle of rate cuts.

The US dollar jumped after the news against most currencies and emerging markets weren’t exempt from the dollar’s rally. The Mexican peso had been enjoying a long rally against the dollar, but that changed yesterday with sharp rally from the dollar.

The interest rate spread for this FX pair is looking like it favors the US dollar as we head to the central banks’ meetings. The Fed has its FOMC meeting on May 1, and Banxico has its next meeting on May 9.

While the odds of a cut in the next Fed meeting are extremely low, forecasts for the Banxico meeting align with a 0.25% cut. The perceived delay in Fed cuts and a continuation of cuts from Banxico is going to penalize the Mexican peso.

Technical View

The day chart for USD/MXN shows that the current bear trend for this FX pair may be in a retracement phase. Yesterday’s candle brought the RSI back above 30, a signal that a correction could be about to take place.

Chart

The past 2 candles dipped just below a major support area at 16.3738 (red line), which was set in October 2015. The market didn’t manage to confirm the break and closed higher the very next day.

Today’s candle met resistance at the 16.5088 level (blue line) which coincided with two dips from the end of March and beginning of May. For the correction to continue we need to see the market close above the blue line.

In which case, the next resistance would be at 16.6228 (green line). While a continuation of the bear trend would need a close below the recent low set yesterday at 16.2588 (black line)