Mexican Peso nears 18.75 as Iran risks and AI selloff hit sentiment

The Mexican Peso slipped for the second day in a row, down 0.16% as the US Dollar remained strong. This followed mounting tensions in the Middle East and worries that big tech firms are borrowing heavily to fund their AI initiatives. The USD/MXN pair is now at 18.72, up 0.20%. Sentiment worsened after the US-Iran conflict intensified, with both countries reportedly preparing for renewed attacks after the US election.

Saudi Arabia also attacked the Houthis, causing energy prices to surge and the US dollar to rise. The Fed is expected to raise rates by 25 basis points by the end of 2026, while Banxico will likely keep rates steady in 2026 and 2027. Mexico's inflation rose above expectations in the first half of October, up from 3.42% to 3.62%, outpacing forecasts of 3.60%.

Core inflation, which excludes volatile food and energy prices, fell to 3.78% from 3.79%. In the US, initial jobless claims remain at around 200,000, indicating a sluggish hiring and firing environment. Earnings are drawing attention, with Tesla and Meta both falling after reporting lower results, undermining overall risk sentiment and contributing to another selloff in AI-related stocks.

The previous week saw higher-than-expected US inflation data, both in consumer and producer sectors, reinforcing the likelihood of interest rate hikes by the Fed towards the end of the year. Investors are eagerly awaiting Mexico's October Retail Sales and Mid-Month Inflation numbers, as well as US data on jobless claims, S&P Global Flash PMIs, and the University of Michigan's final October Consumer Sentiment reading.

The USD/MXN pair is currently trading at 18.7197, maintaining a bullish trend above the 50-, 100-, and 200-day simple moving averages (SMAs) around 17.54. The pair has broken above these levels, extending gains from the mid-16.00s and showing overbought conditions with the Relative Strength Index (14) at 73.87. The next major resistance level is the long-term downward trend line from 21.0808, which could limit further gains.

Support is initially expected at the 50/100/200-day SMA area near 17.54, followed by the horizontal support level around 16.89. The Mexican Peso is the most widely traded currency in Latin America and is influenced by factors such as the Mexican economy's performance, the central bank's policies, foreign investment, and remittances sent by Mexicans living abroad.

Geopolitical events, like the nearshoring trend and fluctuations in oil prices, can also impact the MXN. The Bank of Mexico aims to keep inflation low and stable, setting interest rates accordingly. When inflation is high, the bank raises rates to cool demand, which can strengthen the peso. Conversely, lower rates weaken the MXN.

Macroeconomic data releases are crucial for assessing the economy's health and can affect the peso's value. During periods of economic strength and low unemployment, Mexico tends to attract foreign investment, leading to increased demand for the peso. However, weak economic data can cause the peso to depreciate.