The Mexican peso fell to a six-day low, with further losses expected

The Mexican peso is under pressure, falling more than 1%, with USD/MXN hitting a six-day high of 20.74.
Strong December US nonfarm payrolls data strengthens the dollar; The Fed can keep rates on hold for longer.
The Banxico minutes indicate greater interest rate cuts, which increases pressure on the peso.

The Mexican peso (MXN) is under pressure against the US dollar, hitting a six-day low following the release of a stellar United States (US) jobs report and after the Bank of Mexico (Banxico) revealed that larger deals may be discussed interest rate cuts in the upcoming meetings. The USD/MXN rate is 20.70, up over 1%.

The U.S. Bureau of Labor Statistics (BLS) revealed that the economy added more jobs than expected, causing a slight decline in the unemployment rate. This increases pressure on the Federal Reserve (Fed), which is more concerned about its maximum employment mandate in the second half of 2024.

Recent employment reports showed that the labor market was mighty, but inflation was not. According to the ISM Services PMI report, the prices paid subcomponent rose sharply to 64.4, the highest level since early 2023. After the data release, market participants expected one Fed rate cut in 2025.

Mexico’s economic report revealed that industrial production improved slightly in November, but the data was overshadowed by US data. On Thursday, Banxico published its minutes from its latest meetings, which, while acknowledging that inflation risks are skewed to the upside, indicated that the Governing Council believes monetary policy needs to be less restrictive.

Next week, Mexico’s report will include gross fixed investment and retail sales. In the US, the most critical data releases include producer and consumer inflation data, as well as retail sales and jobless claims for the week ending January 11.

Therefore, the peso would be at risk of further depreciation as the interest rate differential between Mexico and the US narrows. Although Fed officials have stated that it is in an easing cycle, market players expect just 39 basis points (bps) of monetary easing in the US this year compared to 150 basis points in Banxico.

Daily market update: Mexican peso falls amid mighty US dollar

According to the December Nonfarm Payrolls report, the economy added 256,000 jobs. people, which exceeded expectations of 160 thousand. This is despite the downward revision of the data for November, which instead of 227 thousand amounted to 212 thousand
The unemployment rate dropped to 4.1% and the average hourly wage (AHE) dropped from 4% to 3.9%. Following the report, investors now predict that the Federal Reserve will make just one rate cut in 2025.
Banxico meeting minutes revealed the evolution of disinflation, suggesting that the monetary policy easing cycle may continue to contain monetary policy concerns. To achieve this, the Governing Board stated that “larger downward adjustments may be considered at some meetings.”
Mexico’s central bank improved its inflation outlook with progress in headline and core inflation. Officials acknowledged that services inflation has slowed and expect CPI to hit the 3% target in the third quarter of 2026.
US 10-year Treasuries rose sharply to 4.788% before falling five basis points (bps) to 4.739%. Consequently, this weighed on the dollar, as the USD/JPY exchange rate turned negative, although it was close to remaining almost unchanged.
The US Dollar Index (DXY) rose to 109.96, the highest level since November 2022. DXY recently pared some of its gains and is at 109.55, up 0.36%.
On Wednesday, the Fed published the minutes of its December meeting. Although policymakers have lowered interest rates, some participants favored leaving rates unchanged, noting that the evolution of inflation’s downward trajectory has stalled.
As a result, they took a more gradual approach as the minutes highlighted that Fed officials had opened the door to slowing the pace of interest rate cuts.

USD/MXN Technical Outlook: Mexican Peso Remains Strong with USD/MXN Rising Above 20.35

After breaking above the 20.50 level, USD/MXN is on track to test the current year-to-date (YTD) high of 20.90. The slope of the relative strength index (RSI) has reached its latest high, signaling that bulls are gathering strength. Therefore, further growth is seen to the detriment of the better peso.

The first resistance will be the 20.90 level, followed by the 21.00 level. In case of continued strength, the next resistance will be the March 8, 2022 high of 21.46, ahead of the psychological levels of 21.50 and 22.00.

On the other hand, a path of greater resistance, if USDMXN breaks below 20.50, it will expose the 50-day basic moving average (SMA) at 20.30. Once above, the next stop is the psychological level of 20.00, followed by the 100-day SMA at 19.96.