• The Mexican peso extended losses for a second straight day as the USD/MXN pair hit a high of 19.74.
• Banxico cuts interest rates to 10.50%, weakening the peso as economic activity cools and inflation forecasts for 2024 rise.
• US PCE inflation has declined slightly, but core PCE remains within the Fed’s comfortable range of 2-3%.

The Mexican peso lost strength against the US dollar on Friday after United States (US) inflation data fell and failed to provide support for the Mexican currency. However, a recent decision by the Bank of Mexico – known as Banxico – to cut interest rates has weakened the peso. At the time of writing, USD/MXN is trading at 19.72, up 0.50%.

The Federal Reserve’s favorite inflation gauge, the personal consumption expenditures price index (PCE), was lower than expected in August, according to the U.S. Bureau of Economic Analysis (BEA). The same report shows that core PCE, which excludes variable items such as food and energy, rose by a tenth, although it remains in the 2-3% range.

Further data showed that personal spending and personal income showed signs of slowing, while University of Michigan consumer sentiment improved in its final reading for September.

In Mexico, Banxico moved to cut interest rates from 10.75% to 10.50% on Thursday by a 4-to-1 vote, with Lieutenant Governor Jonathan Heath dissenting after voting to keep rates unchanged.

Officials have acknowledged that economic activity is weakening, putting pressure on a labor market that is showing signs of cooling. Banxico revised upwards its nominal and core inflation expectations in 2024, but maintained its estimate that inflation will be on target by the end of 2025.

Despite the inflation revision, the bank said: “[T]the nature of the shocks that have hit the non-core component and the forecast that their impact on headline inflation will continue to fade in the coming quarters,” adding that “while the inflation outlook continues to require a restrictive monetary policy stance, its evolution means that it is appropriate to reduce the level of monetary constraints.”

Source: Banxico forecast

The trade balance showed Mexico’s economy running a deficit five times larger than expected, putting pressure on the peso.

Daily summary of market changes: Mexican peso falls after Banxico decision, US inflation data

• Political turmoil in Mexico is easing as market participants prepare for a presidential change on Oct. 1, a public holiday in Mexico. President-elect Claudia Sheinbaum’s speech will be watched for clues about her economic plan.
• Mexico’s trade balance recorded a deficit of -$4.86 billion in August, wider than the consensus estimate of -$0.5 billion.
• In August, US PCE was 2.2% y/y, up from 2.5% and one tenth lower than the consensus expectation.
• Core PCE increased slightly, as expected, from 2.6% to 2.7% over the same period.
• IU consumer sentiment improved in September from 69.0 to 70.1. Inflation expectations for one year fell from 2.8% to 2.7% and for five years increased from 3% to 3.1%.
• Borrowing costs are expected to decline by 175 basis points by the end of 2025, according to Banxico swap markets.
• The US Dollar Index (DXY), which tracks the dollar against a basket of six similar currencies, remains virtually unchanged at 100.50.
• Market participants have fully priced in a Fed rate cut of at least 25 basis points. However, according to the CME FedWatch Tool, the chances of a 50 basis point easing are 54.7%, down from a 60% chance two days ago.

USD/MXN Technical Analysis: Mexican Peso Falls as USD/MXN Rise Above 19.65

The USD/MXN pair resumed its upward trend, reaching an intraday high of 19.74, following a series of data from Mexico and the US. The relative strength index (RSI) remains bullish, suggesting momentum favors buyers.

Therefore, the USD/MXN pair may be heading towards further gains. The first resistance would be the current week’s high at 19.75. Once crossed, the next stop will be the September 12 peak at 7:84 p.m., followed by the 8 p.m. If these two levels are removed, the current year-to-date (YTD) high of 20.22 will be exposed.

On the other hand, if USD/MXN struggles to break through 19.75, it could pave the way for lower prices. The first support level will be 19.50, followed by the September 24 low of 19.23, after which the pair will approach the September 18 low of 19.06. Once these levels are crossed, the next line of defense will be 7 p.m.