The US dollar continued to gain ground today thanks to some positive economic data and rising geopolitical tensions in the Middle East.

Israel has stated they plan to retaliate, and it seems that risky assets are likely to suffer in anticipation of what could happen.

The dollar also got a boost from yesterday’s better than expected Retail Sales. While today’s data for the housing market wasn’t so bright, in fact, the dollar has lost some ground today against G7 currencies.

While emerging markets’ currencies have continued to decline, as traders and investors look to reduce exposure to risk. More importantly the fundamental analysis for this FX pair is still the same and bullish for the dollar.

The interest rate spread between these two currencies is wide, but Banxico has a much longer runway for cutting interest rates. The Mexican central bank rate is at 11%, while its inflation target is 3% give or take one percent.

Most forecasts see Banxico cutting rates to between 8.5% and 9.5% by the end of 2024, if inflation continues to ease. On the other hand, the Fed is stuck with a stubborn inflation rate, and the easing in monetary policy looks more and more likely to be in the last quarter.

Both central banks meet at the beginning of May, the Fed on the 1^st and Banxico on the 9^th. Expectations are for both of them to keep their rates steady, however, Banxico has a lot more catching up to do whenever it continues to cut rates again.

Technical View

The chart below for the USD/MXN shows a bear trend that’s undergoing a major correction. Today’s green candle has taken the market into the Ichimoku cloud where it found resistance. In fact, today’s high is just above the topside of the cloud, from which the market has retreated.

Various factors make me believe we could see a correction from this recent high. First, the market has had a 6-candle bullish run that has almost created an upward vertical line. Secondly, the market has hit the Ichimoku cloud, which on the day chart proves to be an area of strong resistance.

Thirdly, we are reaching overbought territory on the RSI. We aren’t at or above 70 yet. However, if the bear trend is still intact, then this level of RSI is possibly too high already. Today’s high also attempted to break an historical resistance level which was set in April 2016.

The 17.0495 area (orange line) was the level the market dipped to, and from which the USD/MXN reached its all-time high of 25.7782 in April 2020. If the correction materializes, the next support level is at 16.6228 (green line).