USD/MXN DROPS SHARPLY TOWARD 19.60 AS US DOLLAR TUMBLES

• US Dollar plummets following the release of US inflation data.

• Mexican Peso has the best day in months versus US Dollar.

• USD/MXN back under 19.80 ahead of the Fed and Banxico.

According to the recent data, USD/MXN is falling sharply on Tuesday amid risk appetite and a weaker US Dollar across the board. The pair reversed sharply from monthly highs after the release of US inflation numbers.

The US Consumer Price Index rose below expectation in November and triggered a rally in Treasuries and sent the Dollar sharply lower. Attention now turns to the FOMC meeting. On Wednesday, the Federal Reserve will announce its decision on monetary policy. A 50 bps rate hike is expected.

The Bank of Mexico meets Thursday. Also a 50 bp rate hike to 10.5% is expected. At the last policy meeting November 10, the bank hiked rates 75 bp to 10.0%. The vote was 4-1, with Deputy Governor Esquivel voting for a smaller 50 bp move.

The bank said that the magnitude of future hikes will be decided the circumstances, suggesting greater data-dependence. Since then, headline inflation came in lower at 7.80% y/y in November, but core continues to accelerate to new highs. The swaps market is pricing in a policy rate peak near 10.75%, explained analysts at Brown Brothers Harriman.

USD/MXN FACES STRONG RESISTANCE NEAR 19.80

The rally of the USD/MXN from the lowest level in years near 19.00 peaked on Monday at 19.92. It then started to pullback being unable to consolidate above the 19.80 key area and also rejected from above the 100-day Simple Moving Average (currently at 19.88).

A consolidation between 19.60 and 19.80 seems likely for now. A break under 19.60 should strengthen the Mexican Peso that could go toward the 20-day SMA at 19.47.