• The Mexican peso is rising sharply, with the USD/MXN rate falling more than 2%.
• Mexico’s economy is sending mixed signals, with GDP growth in Q2 coming in at 2.1% year-on-year, but economic activity slowing and Banxico questioning the wisdom of recent interest rate cuts.
• Powell’s Jackson Hole speech hints at coming interest rate cuts.

The Mexican peso rose sharply against the U.S. dollar on Friday after Federal Reserve (Fed) Chairman Jerome Powell announced that the central bank was ready to begin a cycle of monetary easing. This undermined the U.S. dollar, which is falling to a up-to-date yearly low, according to the U.S. Dollar Index (DXY). USD/MXN is down more than 2% and trading at 19.06 after retreating from an intraday peak of 19.53.

The USD/MXN pair continued to decline following Powell’s comments that “it is time for policy adjustment.”

He said the Fed is dependent on data on the size and timing of easing and added that he is confident that inflation will reach the Fed’s 2% target. On achieving maximum employment, he said the risks are tilted to the upside.

Following Powell’s speech, traders priced in a 33% chance that the Fed will cut interest rates by 50 basis points at its September meeting. Meanwhile, the December 2024 federal funds rate futures contract shows that market participants expect 100 basis points of easing in 2024.

Meanwhile, there was no economic data from Mexico on Friday. However, Thursday’s data showed the country grew by 2.1% year-on-year in the final reading of gross domestic product (GDP) for the second quarter of 2024. In terms of economic activity, used by the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) as a measure of growth, the economy contracted at a rate of -0.6%, missing estimates and May’s data of 0.9% and 1.6%, respectively.

On Thursday, Banxico released the minutes of its last meeting, at which the central bank cut rates to 10.75%. The minutes revealed that while “the inflation outlook continues to require a tight monetary policy,” “significant progress” on inflation suggested it was appropriate to “reduce the level of monetary constraints.”

Lieutenant Governors Jonathan Heath and Irene Espinosa, who voted against the rate cut, expressed concerns that undermining the credibility of Mexico’s central bank could have harmful effects.

Daily Market Factors Review: Mexican Peso Boosted by Powell’s Dovish Bias

• Inflation in Mexico fell from 5.61% to 5.16% in mid-August, lower than the 5.31% estimated by economists. Core inflation fell below the 4% threshold, decreasing from 4.02% to 3.98% year-on-year, which was lower than expectations for a 4.06% escalate.
• Given the underlying factors of Mexico’s economic slowdown and the push for lower inflation, this could pave the way for further monetary easing by Banxico, despite its divided decision in August.
• Reuters, citing sources, said the Mexican data and the start of the Fed’s easing cycle escalate the likelihood that the Mexican central bank will cut interest rates again in September.
• If the Fed cuts interest rates aggressively, this could improve the outlook for the Mexican peso and the USD/MXN rate could fall below the psychological level of 19.00.
• After Powell spoke, other Fed officials spoke to the media. Philadelphia Fed chief Patrick Harker said the Fed must methodically cut interest rates. Chicago Fed chief Austan Goolsbee added that policy was at its tightest level and the Fed was focused on delivering on its jobs mandate.

Technical Outlook: Mexican Peso Gains as Traders Push USD/MXN Towards 19.00

USD/MXN remains bullish but a double top formation is emerging. Momentum is shifting lower but the Relative Strength Index (RSI) remains in bullish territory.

If USD/MXN breaks below 19.00, it could extend a decline towards the August 19 low of 18.59 with further weakness. The pair could test the 50-day elementary moving average (SMA) of 18.45 and then the psychological 18.00 mark.

On the other hand, if buyers keep USD/MXN above 19.00, it could pave the way for consolidation. If the pair breaks above 19.40, expect a move towards 20.00 before testing the yearly (YTD) high of 20.22.