- USD/MXN drops to two-day lows at 18.81.
- The US Dollar falls to its lowest level since August 5.
- US inflation eases to 2.9% annually from 3% in June, its lowest level in 40 months.
The USD/MXN opened Wednesday’s session hitting a daily high of 19.04 before falling after the release of the US inflation data to 18.81, its lowest level in two days. At the time of writing, the Dollar is trading against the Mexican Peso around 18.83, losing 1.02% on the day.
US Dollar Falls Again as Inflation Weakens
The US Consumer Price Index (CPI) eased by one-tenth in the annual reading for July, standing at 2.9% compared to 3% in June, its lowest level in 40 months, according to the US Department of Labor. The figure is in line with market expectations. Inflation excluding food and energy, the so-called core CPI, has eased to 3.2% from the previous 3.3%, its lowest level in 39 months, as expected.
The US Dollar Index (DXY) has reacted with a rebound following the release, falling to 102.31, its lowest level in nine days. The greenback has weakened as the moderation in inflation paves the way for the Fed to make its first interest rate cut at its September meeting. According to CME Group’s FedWatch tool, the odds of a 25 basis point cut in September stand at 56.5%, while the chances of a 50 basis point cut have declined to 43.5% from 53.5% yesterday.
Traders will now wait to digest the data, while keeping an eye on the release of US retail sales for July due tomorrow, which are expected to rise 0.3% from 0% in June.
USD/MXN Price Levels
If the price continues to decline, the first support is at the August lows of 18.40/18.45. Below that, the round level of 18.00 awaits, and further below that, the 100-day moving average at 17.61.
On the upside, initial resistance appears at the 19.00 area followed by the August high at 20.06. Further up, the September 28, 2022 ceiling at 20.57 awaits.
US Dollar FAQs
The United States Dollar (USD) is the official currency of the United States of America, and the de facto currency of a significant number of other countries where it is in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in daily transactions. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the dollar.
In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of the US dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing securities in new purchases. It is generally positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
