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USD/MXN Outlook: Downside Pressure Continues as Investors Cheer Drug Hopes

Main USD/MXN Talking Points:

  • Approval of a Phase II trial for a Covid-19 drug kept market sentiment high
  • Souring US-China relationship set off alarm bells
  • USD/MXN breaks the symmetrical triangle and points towards further losses

This week has brought another round of down-pressure for USD/MXN, which has seen the US Dollar fall 4% against the Mexican Peso, breaking the symmetrical triangle pattern and resting around the 22.90 mark. Broad-based Dollar weakness and risk-on sentiment dominated the first half of the week on the back of a possible drug to fight Covid-19.

News emerged on Monday that pharmaceutical company Moderna had received approval from the FDA to continue trialling a possible vaccine to combat the virus. Their drug has been the only one to receive approval for a Phase II trial, which will include around 600 healthy volunteers, and is expected to be concluded by this summer.

But sentiment turned sour towards the end of the week as global virus cases crossed 5 million worldwide, coupled with a substantial increase in South American cases. Adding to the ongoing health concerns, an increase in US-China tensions has caused investor weariness after Donald Trump warned he would act strongly given any retaliation from China.

Additionally, slipping oil prices caused the Mexican Peso to retreat from its 2-month high against the Dollar, given that Mexico is one of the biggest producers of crude in the world.

USD/MXN FORECAST AND ANALYSIS

USD/MXN 4-hour chart (1 April – 22 May 2020)

USDMXN chart

Looking at the 4-hour chart we can see how USD/MXN slid below the lower limit of the ascending triangle formation in the first part of the week. The pair now holds steady at the 38.2% Fibonacci retracement level from the February to March uptrend, hovering either side of the 22.90 mark. Momentum indicators show continued downside pressure as the Mexican Peso regains buyer traction, but Dollar support at 22.45 could see a rebound of USD/MXN if the pair manages to fall past the Thursday’s lows at 22.75. After that, no critical support is found until the 61.8% Fibonacci at 21.32, where downside pressure was halted at the beginning of March.

If USD buyers regain control, initial resistance will be met at Thursday’s highs around 23.27, followed by support-turned-resistance at 23.49. Further downside pressure could emerge as USD/MXN nears the 50-DMA line, currently at 24.02. Any further bullish push will be met by the monthly high at 24.89.

— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin