Mexico’s inflation data for March has shot up as expected, with the CPI reading coming in at 4.67% year on year, and the monthly core CPI reading actually coming in above expectations at 0.54% (Exp. 0.52%). The yearly figure continues to rise above Banxico’s target of 3% and is confirming the trend of rising prices as the country attempts to recover from the Covid-19 pandemic.

This follows on from a halt in the rates easing cycle from Banxico as the central bank was concerned about overheating inflation as economic recovery was getting underway. So this latest reading has just put more pressure on the bank to decide whether it is going to react to rising inflation or remain supportive of the economy with a loose monetary policy in the foreseeable future.

We may see further guidance on this as the Banxico March meeting minutes will be released this afternoon. Any indication that the bank will resume its hawkish stance could see the Mexican Peso outperform against funding currencies like the US Dollar and the Euro.

USD/MXN Daily Chart

USD/MXN has been in a strong descending channel since it marked a 4-month high at the beginning of March. The Fibonacci levels have been of significant importance for the pair since the recovery from the Covid-19 pandemic started, so it’s not surprising to see USD/MXN struggling to get a meaningful break below the 76.4% Fibonacci (20.18) once again.

Once below this area, we may see sideways consolidation above the 19.87 support area but if the price manages to fall below the 20 peso mark then sellers are in a good position to bring the pair down further. To the upside, the main risk is the appreciation of the US Dollar on the back of rising bond yields but the descending trendline seems to be offering some good resistance at 20.34.