• The Mexican peso hits a three-week high while the U.S. dollar falls.
• Expectations of a Fed rate cut are rising, with the CME FedWatch Tool indicating a 43% probability of a 50 basis point cut, putting pressure on the US dollar.
• Political concerns in Mexico eased after the approval of a judicial reform, which helped the peso strengthen.

The Mexican peso gained for a third straight session against the U.S. dollar amid a general weakening of the latter. Market participants gaining confidence that the U.S. Federal Reserve (Fed) will cut borrowing costs “aggressively” boosted the Mexican currency, which shrugged off concerns about judicial reform. USD/MXN trades at 19.25, down 1.30%.

The greenback has been in the spotlight over the past two trading sessions. On Thursday, investors seemed confident that the Fed would cut interest rates by 0.25% based on data provided by the CME FedWatch Tool. However, a worse-than-expected Initial Jobless Claims report overshadowed the rise in the Producer Price Index (PPI).

On Thursday, the CME FedWatch tool showed that the probability of a 50 basis point cut by the Fed was 28%. However, at the time of writing, the probability had risen to 43% and a 25 basis point cut had fallen to 53%.

This undermined the dollar, which lost 0.17% to change hands at 101.06, according to the US Dollar Index (DXY).

The University of Michigan (UoM) revealed that its consumer sentiment indicator rose to a four-month high in September, helped by improving inflation expectations.

Meanwhile, in Mexico, political unrest has subsided following the approval of the Judicial System Act.

Gerardo Carrillo, regional director for LATAM at Fitch Ratings, commented on Mexico’s creditworthiness. He said: “The rating outlook is stable, which means we see a balance between strengths and weaknesses. Before there is an outright downgrade of the sovereign rating, we can expect a change in the outlook, either from stable to positive or from stable to negative, with the latter likely to happen.”

On Thursday, Bank of Mexico (Banxico) Economic Research Director Alejandrina Salcedo said a solid rule of law environment could aid create conditions that encourage investment. She added that respect for the rule of law and public security “would provide greater certainty, increase the flow of investment in all regions and help seize the opportunities offered by the relocation process.”

Daily Market Factors Review: Mexican Peso Boosted by US Dollar Weakness

• The USD/MXN pair will continue to be influenced by market sentiment and expectations for a deeper Fed rate cut.
• Next week, Mexico’s economic calendar will feature data on aggregate demand and private spending in the second quarter of 2024.
• Inflation in Mexico fell below 5% in August, raising the prospects for further monetary easing by Banxico.
• A September Citibanamex survey showed that Banxico would likely cut interest rates to 10.25% in 2024 and to 8.25% in 2025. The USD/MXN exchange rate is forecast at 19.50 at the end of 2024 and 19.85 at the end of 2025.
• UoM’s consumer sentiment index rose from 67.9 to 69.0, beating estimates of 68.
• Inflation expectations improved from 2.8% to 2.7% over a one-year period. Over a longer period, they rose from 3% to 3.1%.
• The greenback remained on offer in the US after the US Bureau of Labor Statistics revealed that August PPI data was mixed. At the same time, the number of Americans applying for unemployment benefits rose in line with estimates and exceeded the previous week’s reading.
• Data from the Chicago Board of Trade indicate the Fed will cut interest rates by at least 98 basis points this year, down from 108 a day earlier, according to the December 2024 federal funds rate futures contract.

USD/MXN Technical Outlook: Mexican Peso Rising, USD/MXN Falls Below 19.30

The sudden pullback in USD/MXN has pushed the exotic pair over 7,000 pips below the psychological 20.00 mark, although key support levels are ahead. Nevertheless, the momentum has changed in favor of sellers as the Relative Strength Index (RSI) has turned bearish.

Therefore, USD/MXN is tilted lower in the brief term. The first support will be the August 23 low of 19.02. A break of the latter will expose the 50-day moving average at 18.99, followed by the August 19 cycle low of 18.59.

On the other hand, USD/MXN needs to break through the psychological 20.00 level to continue the uptrend. If breached, the next ceiling level will be the YTD 20.22 level. With further strengthening, the pair could challenge the intraday high of September 28, 2022 at 20.57. If these two levels are breached, the next stop will be the swing high of 20.82 on August 2, 2022, before 21.00.