Mexican Peso struggles amid geopolitical tensions despite recording solid Retail Sales

• Mexican Peso dips to six-month low, reacting sharply to the geopolitical conflict between Israel and Iran.
• Retail Sales in Mexico show improvement, offering some support and reducing losses in USD/MXN from earlier peaks.
• Banxico Deputy Governor Galia Borja comments on the ongoing challenge to reach inflation targets.

The Mexican Peso remains on the defensive after plummeting close to 5% against the US Dollar during the overnight session for North American traders. Newswires that Israel attacked Iran in retaliation for the April 13 attack triggered a massive flight to safe-haven assets, a headwind for the Mexican currency. However, economic data from Mexico lent a lifeline to the Peso, which fell to a six-month low. The USD/MXN trades at 17.23, up by close to 1%.

According to Reuters, Israel attacked Iran in response to the April 13 drone attacks. There were reports of explosions in the Iranian city of Isfahan, which houses a military base. However, Iran is now downplaying the level of damage, and it appears there might not be a military response.

In Mexico, the National Statistics Agency (INEGI) revealed that US Retail Sales improved in February compared to January. That triggered a recovery, sending the USD/MXN lower from 17.37 to 17.19. Elsewhere, Bank of Mexico (Banxico) Deputy Governor Galia Borja said, "There was much left to be done" to bring inflation down and move toward Banxico's 3.0% target.

Across the border, the economic docket in the United States (US) featured a speech by Chicago Federal Reserve President Austan Goolsbee, who shifted more neutral following his previous dovish stance.

Daily digest market movers: Mexican Peso treads water despite being boosted by Retail Sales

• Mexico's Retail Sales rose by 0.4% MoM in February compared to January, up 3.0% in the twelve months to the same period. This performance improved over the previous month when sales decreased by -0.6% MoM and -0.8% YoY.
• A preliminary report by INEGI revealed that, based on preliminary estimates, Mexico's economy likely grew 2.1% YoY in March.
• On Wednesday, Bank of Mexico (Banxico) Deputy Governor Jonathan Heath commented that caution is important before normalizing monetary policy amid stubbornly sticky inflation. He added, "Maintaining a restrictive monetary policy is key for some time."
• The International Monetary Fund (IMF) revised its economic growth forecasts for Mexico, lowering the 2024 growth expectation from 2.7% to 2.4% and the 2025 forecast from 1.5% to 1.4%. The IMF attributed the reduction in the 2025 forecast to anticipated fiscal tightening by the new administration, which is expected to reverse the fiscal expansion that is driving growth this year. This reversal will involve scaling back current spending policies.
• Chicago Fed President Goolsbee said that it makes sense to wait and get more clarity before easing policy, adding that the current restrictive monetary policy is appropriate.
• On Thursday, Atlanta Fed President Raphael Bostic stated the central bank would likely not reduce rates in 2024. Echoing his comments was the New York Fed's John Williams, commenting that current monetary policy is in a good place, indicating no rush to cut rates.
• Data from the Chicago Board of Trade (CBOT) suggests that traders expect the Fed funds rate to finish 2024 at 4.995%, down from 5% a day ago.

Technical analysis: Mexican Peso plummets as USD/MXN buyers reclaim 200-day SMA

Following the overnight developments, the USD/MXN has shifted to a bullish bias, breaching the 200-day Simple Moving Average (SMA) at 17.16, a key support and resistance level. Traders use this level as a dynamic resistance/support level that depicts an asset's overall trend.

However, USD/MXN buyers are not yet out of the woods. They must achieve a daily close above the January 23 high at 17.38, which would expose the 17.550 figure. Further upside is seen at 17.56, the December 5, 2023 swing high, ahead of the 18.00 mark.

On the other hand, if USD/MXN slides below the 200-day SMA, look for a retracement to the 100-day SMA at 17.08. If it is surpassed, sellers could drag the exchange rate toward the 17.00 figure.