The Mexican Peso has been trading flat as traders choose to cover their long positions after a recent rally. Market risk has eased, helping the Peso recover, along with high inflation expectations in Mexico. The Pound Sterling has been seeing the most gains against the Peso on Friday following strong UK data releases.
Lower interest rates are typically negative for a currency as they attract fewer foreign capital inflows. Despite expectations of further interest rate cuts by the Banco de Mexico, the Mexican Peso has managed to hold its value well due to the initially high interest rates and the possibility of slower rate cuts in the future due to high inflation levels.
Currently, one US Dollar buys 18.70 Mexican Pesos, EUR/MXN is at 20.57, and GBP/MXN is at 24.12. The Mexican Peso has been easing after a recent rally, trading lower in its major pairs towards the end of the trading week. Positive economic data from the US, such as Retail Sales and Initial Jobless Claims, has improved market sentiment and supported the risk-sensitive Mexican Peso.
The VIX volatility index, indicating investor nervousness, has fallen to levels lower than before the panic sell-off triggered by weak July Nonfarm Payrolls. This recovery in market sentiment has been beneficial for emerging market FX. The Pound Sterling has been performing strongly against the Mexican Peso on Friday following a series of positive data releases out of the UK.
The perception of prolonged high inflation in Mexico could be supporting the Peso, as it may lead to a slower pace of interest rate cuts by the Banco de Mexico than previously expected. Headline inflation in Mexico currently stands at 5.57%, with core inflation falling for 18 consecutive months to 4.05%. The recent unexpected interest rate cut by Banxico brought the policy rate down to 10.75%, which remains relatively high and continues to attract carry trade flows.
Technical analysis of USD/MXN suggests a possible down move within a rising channel, expected to continue towards either the 50-day Simple Moving Average at 18.40 or the lower channel line in the 18.30s. The economic indicator of Retail Sales, released monthly in the UK, measures the volume of sales of goods by retailers directly to end customers. Changes in Retail Sales are closely monitored as an indicator of consumer spending, with high readings seen as bullish for the Pound Sterling.
