The Mexican Peso faced a slight decline against the US Dollar on Monday, dropping by 0.29% as investors turned risk-averse due to weak economic data from China and political uncertainties in Europe. This volatility in the emerging market currency is expected to continue as the market reacts to the upcoming judicial reform proposed by President Andres Manuel Lopez Obrador and approved by President-elect Claudia Sheinbaum in September.

Last week, the currency received some stability following verbal intervention from Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja, who emphasized the central bank’s commitment to monitoring currency volatility and maintaining order in the markets. Despite the reassurances from Sheinbaum about the health of Mexico’s economy, investors remain cautious as the economic data from Mexico is anticipated to reveal a slowdown, partly attributed to the high interest rates set by Banxico at 11%.

The USD/MXN exchange rate is also influenced by the political uncertainty surrounding the proposed changes to the Mexican Constitution, which has led to fluctuations in the currency. Additionally, the decision by the Federal Reserve to keep rates unchanged and project only one interest rate cut in 2024 has boosted the US Dollar and pushed the USD/MXN to 14-month highs.

Looking ahead, the Mexican Congress is considering several reform proposals presented by AMLO in February 2024, including changes to the Supreme Court, electoral reforms, and reforms to autonomous bodies. The outcome of these proposed reforms could further impact the Mexican Peso and influence Banxico’s decision on easing policy in the upcoming June 27 meeting.

According to Morgan Stanley, an unorthodox agenda adopted by Mexico’s new government and Congress could undermine the country’s institutions and have a bearish effect on the Mexican Peso, potentially weakening it to 19.20. Moreover, the latest US inflation report has increased the likelihood of a Fed rate cut in September, which could further impact the USD/MXN exchange rate.

From a technical analysis perspective, the USD/MXN uptrend remains strong, with potential resistance levels at 18.99 and 19.23. However, a breach of support at 18.15 could keep the pair trading within a range.

In terms of economic indicators, the upcoming Retail Sales data release by INEGI will provide insights into consumer spending trends, which could affect the sentiment towards the Mexican Peso. Overall, the economic and political developments in Mexico and the US will continue to influence the exchange rate between the USD and MXN, requiring investors to remain vigilant and adapt to market conditions accordingly.