The Mexican Peso made a significant recovery against the US Dollar, reaching 18.24 following Banxico’s decision to keep rates unchanged at 11.00%. This decision was influenced by “idiosyncratic factors” and the Peso’s depreciation after the June 2 general election results. Despite trading with losses of 0.73% during the day, the USD/MXN ended the week and month with gains of 1.19% and 7.72%, respectively. Banxico’s decision was praised by many for offering support to the struggling Peso.
The Bank of Mexico expects headline inflation to reach the bank’s target of 3% by Q4 2025 and recognized the increased risks of inflation due to factors such as high services inflation, cost pressures, Peso devaluation, and geopolitical tensions. On the other hand, the US Federal Reserve reported improvements in the PCE Price Index as per consensus expectations but failed to boost the US Dollar, which remained under pressure. As a result, the USD/MXN pair may continue to weaken in the short term, with sellers targeting an April 19 high of 18.15.
Banxico’s decision to maintain the rate at 11.00% was not unanimous, and Deputy Governor Omar Mejia Castelazo advocated for a quarter of a percentage rate cut. The central bank’s monetary policy statement indicated that the disinflation process is expected to progress, leaving room for discussions on rate adjustments in the future. Economists in a Citibanamex survey revised their GDP forecast for 2024 downward and anticipated the USD/MXN exchange rate to finish the year at 18.70.
In the US, the PCE was in line with expectations, showing little change in inflation figures. Consumer sentiment data for June deteriorated compared to the previous month but improved from the preliminary reading. The CME FedWatch Tool kept the odds of a 25-basis-point Fed rate cut unchanged from the previous day at 59.5%. From a technical analysis standpoint, the USD/MXN pair is showing signs of a bearish continuation as sellers aim to breach key support levels and push the pair lower.
Understanding inflation is crucial in analyzing the movements in currency markets. Inflation measures the rise in the price of goods and services, with headline inflation expressed as a percentage change on a month-on-month and year-on-year basis. Core inflation excludes volatile elements like food and fuel, focusing on the level targeted by central banks to maintain stability around 2%. The Consumer Price Index (CPI) tracks changes in prices over time, with core CPI being the figure central banks monitor closely for policy decisions.
In times of high inflation, central banks typically raise interest rates to combat price increases, attracting more capital inflows and strengthening the currency. Traditionally, Gold was sought after as a hedge against inflation, but higher interest rates can dampen its appeal. Lower inflation tends to be positive for Gold as it reduces interest rates, making the precious metal a more attractive investment option. Overall, understanding inflation dynamics is essential for predicting currency movements in the forex market.
