• Mexican peso depreciates and reverses weekly gains amid mixed US economic reports.
• The U.S. producer price index rose to its highest level since June, fueling debate about inflation trends.
• The Fed is expected to cut interest rates by 25 basis points next week.

The Mexican peso is weakening after consecutive days of gains, falling more than 0.44% against the US dollar as mixed US economic data and a holiday in Mexico worsen trade conditions. USD/MXN is trading at 20.20 after rebounding from weekly lows of 20.09.

According to the U.S. Bureau of Labor Statistics, U.S. factory inflation rose in November. According to monthly data, the Producer Price Index (PPI) rose to its highest level since June. At the same time, the Department of Labor reported that the number of Americans filing for unemployment benefits increased.

Even though inflation has picked up again, market players seem confident that the Federal Reserve (Fed) will cut interest rates at next week’s meeting. According to the federal funds rate futures market, the probability that the Fed will cut interest rates by 25 basis points is currently 99%.

Mexico’s economic document revealed that industrial production fell sharply in October on a monthly and annual basis.

On Wednesday, the Bank of Mexico (Banxico) maintained confidence in the country’s financial system despite the “marked weakness” experienced by Latin America’s second-largest economy. In its half-year report, Banxico highlighted solid institutions ensuring system stability, adding that capital and liquidity levels exceed regulatory minimums.

Additionally, Banxico is expected to continue its monetary easing cycle after Monday’s inflation report. The November consumer price index (CPI) opened the door to further easing of monetary policy. JP Morgan analysts noted that Banxico could cut interest rates by 50 basis points (bps) as inflation data shows prices falling faster than expected.

In Mexico, the economic book for the remaining week is empty. In the US, import and export prices will be quoted.

Daily summary of market changes: Mexican peso on the defensive after balmy American PPI

• November’s PPI showed headline inflation rising to 3% y/y, up from 2.4% in October and above the expected 2.6%. Core PPI also rose to 3.4% y/y, beating forecasts of 3.2% and October’s 3.1%.
• New US unemployment claims rose to a two-month high of 242,000 in the week ending December 7, well above the forecast 220,000.
• Mexico’s industrial production fell by -1.2% m/m in October, compared with growth of 0.6% in September and well below estimates of -0.2%. In annual terms, production decreased by -2.2% y/y from -0.3%, with no forecasts of -0.6%.
• The swaps market suggests Banxico will cut interest rates by 25 basis points at its December 19 meeting.
• The US yield curve for 2025 suggests that speculators are estimating a easing of 100 basis points at the end of the year.
• Data from the Chicago Board of Trade from the December Federal Funds Rate Futures contract show that investors estimate the Fed will be at 24 basis points by the end of 2024.
• Banxico Governor Victoria Rodriguez Ceja remains dovish. In a recent interview with Reuters, she said that given the progress of disinflation, the central bank may continue to reduce borrowing costs.

USD/MXN Technical Outlook: Mexican Peso loses as the pair rises to 20.20

USD/MXN is rebounding from weekly lows as the exotic pair has been consolidating below the 20.10 area for the past four days. However, demand for the US dollar weighed on the peso and pushed the pair back to the 20.20 level.

The momentum remains tilted to the downside, as illustrated by the Relative Strength Index (RSI). However, sellers need to push USD/MXN below 20.00, which will pave the way for lower exchange rates.

In this case, the next support for USD/MXN will be the 100-day uncomplicated moving average (SMA) at 19.68, ahead of 19.50. In case of further weakness, the pair may test the October 4 low of 19.10 before 7 p.m.

Conversely, if buyers hold USD/MXN above 20.20, the next resistance will be 20.50. A breach of the latter will expose the December 2 intraday high of 20.59, followed by a year-to-date (YTD) high of 20.82 and then 21.00.