Mexican Peso Remains Forceful as Mexican Congress Takes Office

The Mexican peso strengthens against the U.S. dollar as core PCE inflation falls below expectations, strengthening the prospect of interest rate cuts by the Federal Reserve.
Ongoing political uncertainty in Mexico is dampening demand for the peso.
Banxico lowers GDP forecasts for 2024 and 2025, pointing to slower growth and potential interest rate cuts.

The Mexican peso pared losses against the U.S. dollar on Friday after the Federal Reserve’s (Fed’s) preferred inflation indicator, the core Personal Consumption Price Expenditures Price Index (PCE), came in a tenth lower than expected, suggesting that disinflation was evolving. That gives the Fed the green lithe to start cutting interest rates, which is a headwind for the U.S. dollar. At the time of writing, USD/MXN is trading at 19.64, down 1.01%.

There was no Mexican economic calendar this week. But political uncertainty over judicial reform and the dissolution of autonomous bodies in legislation pushed by President Andres Manuel Lopez Obrador could make investors nervous as the fresh Mexican Congress takes office.

In addition, the Bank of Mexico (Banxico) makes a negative assessment of economic growth, estimating that Gross Domestic Product (GDP) will decline from 2.4% to 1.5% in 2024 and from 1.5% to 1.2% in 2025 after the publication of the quarterly revision for the second quarter of 2024.

National Bank President Victoria Rodriguez Ceja warned that changes to key reference rates would only be gradual if macroeconomic conditions allow.

As a result, most banks expect Banxico to cut interest rates by at least 50 basis points (bps) by the end of 2024. This would put pressure on the Mexican currency, which has already lost 15.38% year-on-year.

Across the border, the U.S. Bureau of Economic Analysis revealed that disinflation is continuing. The Fed’s favorite inflation gauge, core PCE, fell year-over-year, while the headline numbers remained unchanged.

Meanwhile, the University of Michigan’s (UoM) consumer sentiment survey improved for the first time in five months in August and exceeded the preliminary reading released two weeks ago.

The UoM survey showed that inflation expectations in the one-year horizon fell, while in the five-year horizon they remained unchanged.

Daily Market Update: Mexican Peso Strikes Back, Ignoring Political Uncertainty

Mexican President Andres Manuel Lopez Obrador’s decision to suspend relations with the U.S. and Canadian ambassadors this week will continue to weigh on the Mexican peso.
The US core PCE reading for July showed prices rising 2.6%, unchanged from the previous month but less than the 2.7% year-over-year estimate. The headline PCE was up 2.5% year-over-year, below forecasts for a 2.6% boost.
The same report reveals that consumer spending has increased while income growth has been leisurely, raising questions about whether Americans will keep up the pace.
According to UoM, the US consumer sentiment indicator in August rose from 66.4 in July to 67.9. Inflation expectations for the year fell from 2.9% to 2.8%, and for the medium term – five years – amounted to 3%.
Data from the Chicago Board of Trade (CBOT) indicates that the Federal Reserve will cut interest rates by at least 97 basis points (bps), according to the December 2024 federal funds rate futures contract.

Technical Outlook: Mexican Peso Rising, USD/MXN Falls Below 19.70

The USD/MXN pair’s uptrend continues, although the exotic pair has dipped towards the 19.65 level as traders are increasingly confident that the Fed will begin a monetary easing cycle, narrowing the interest rate differential between the U.S. and Mexico.

The Relative Strength Index (RSI) is mixed, in bullish territory but is trending lower, showing that sellers have the upper hand in the tiny term.

If USD/MXN weakens further, the first support will be the 19.50 level, a break of which will expose the August 23 swing low of 19.02 before paving the way for sellers to test the 50-day plain moving average (SMA) at 18.59.

However, if the pair remains above 19.50, a challenge to the 20.00 level is in the cards. After breaking through this level, the next stop would be the year-to-date (YTD) high at 20.22, followed by the September 28, 2022 intraday high at 20.57. If these two levels are broken, the next stop would be the August 2, 2022 swing high at 20.82, before 21.00.