The Mexican peso rises as U.S. GDP data shows an economic slowdown

The Mexican peso strengthened to 16.92 after hitting a four-week low of 17.13.
US GDP data unchanged; higher unemployment claims suggest an economic slowdown, weakening the US dollar.
Banxico revises inflation forecasts upwards, suggesting a potential split decision on interest rate cuts in June.

The Mexican peso (MXN) recovered some of its earlier losses against the US dollar (USD) and rose by about 0.20% after GDP data from the United States (US) showed the economy was slowing. Mexico’s economic report included the release of employment data, which was in line with expectations, while improving risk appetite and a weakening dollar were a tailwind for the Mexican currency. USD/MXN is trading at 16.92 after hitting a four-week high of 17.13.

The US Bureau of Economic Analysis (BEA) released its second estimate of Gross Domestic Product (GDP) for the first quarters, which remained unchanged and in line with the preliminary reading. At the same time, the U.S. Bureau of Labor Statistics (BLS) revealed that the number of Americans filing unemployment claims increased compared to expectations, a sign of weakness.

US Treasury yields fell slightly following the data, while the US Dollar Index (DXY), which tracks the dollar’s value against a basket of six currencies, erased Wednesday’s gains, falling 0.41% to 104.68. This strengthened the peso as the emerging market currency fell below 17.00 and strengthened sharply.

According to April employment data, Mexico’s National Statistics Agency (INEGI) revealed that the labor market continues to nippy.

On Wednesday, the Bank of Mexico (Banxico) published a quarterly report in which it increased its inflation forecasts. Elevated and persistently high inflation has divided Banxico’s Governing Council.

Banxico forecasts headline inflation at 4% at the end of 2024, up from 3.5% in the previous report. Core prices are expected to augment from 3.5% to 3.8%.

Banxico Governor Victoria Rodriguez Ceja added that progress has been made in reducing inflation, adding that she will “assess the outlook for inflation as a whole and […] We will discuss adjustments to the reference rate at our next meetings.”

Goldman Sachs analysts suggested that the June meeting would be lively. They added: “If a rate cut does occur, it will likely be the result of a split decision.”

Meanwhile, investors are preparing for the April release of the Consumer Expenditures Price Index (PCE), the Federal Reserve’s (Fed) preferred inflation gauge. This, along with Sunday’s general elections in Mexico, could set USD/MXN’s path for the second half of the year as the Mexican currency remains one of the strongest against the US dollar.

Daily summary of market movements: Mexican peso on the offensive after faint US GDP data

Mexico’s unemployment rate in April was in line with expectations at 2.6%, down from 2.3% in March.
The latest economic data from Mexico presents a mixed economic outlook. Although the economy continued to grow, higher prices and a growing trade deficit could weaken the Mexican peso.
This and speculation of another interest rate cut from Banxico in June could pave the way for further gains in USD/MXN.
A May Citibanamex poll showed that most economists estimate that Banxico will cut interest rates on June 27 from 11% to 10.75%. The median expects headline inflation in 2024 to be 4.21% and core inflation to be 4.07%.
The US economic document included the second estimate of Gross Domestic Product (GDP) for the first quarter of 2024, which, in line with analysts’ expectations, fell from 3.4% to 1.3% q/q.
Jobless claims rose by 219,000 for the week ending May 25, exceeding the consensus estimate of 218,000. and the previous reading of 216,000.
Still, federal funds rate futures were projecting them to decline 27 basis points by the end of the year.

Technical Analysis: The Mexican Peso gains value as USD/MXN falls below 17.00 again

The USD/MXN downtrend remains in play, although buyers have gained strength and pushed the exchange rate towards 17.13, timidly testing the 200-day straightforward moving average (SMA) at 17.14. Momentum remains bullish, but buyers can take a breather after prices rose nearly 3% in three days, punctuated by faint US data.

If buyers reclaim the 17.00 level, it could pave the way for breaking the weekly high of 17.13. After clearing, the next one will be the 200-day SMA at 17.14, before challenging the December 7 high of 17.56, followed by a psychological level of 18.00.

On the other hand, a bearish continuation would occur if sellers maintain the exchange rate below the 100-day SMA, which could pave the way for a decline to the 2023 low of 16.62 and then the May 21 cycle low of 16.52 and the previous minimum of 16.25.