The Mexican Peso has recently experienced a surge to a three-week peak against the US Dollar, bolstered by expectations of an aggressive interest rate cut by the US Federal Reserve. Market participants have gained confidence in the possibility of a rate cut, leading to a weaker US Dollar. This increase in rate cut expectations comes as the CME FedWatch Tool shows a 43% chance of a 50 basis points cut, putting pressure on the Greenback. Additionally, political concerns in Mexico have eased following the approval of a judicial reform, contributing to the Peso’s rally.
The USD/MXN pair is currently trading at 19.25, down 1.30%, as the Greenback remains the focus of the market. Investors are anticipating an interest rate cut by the Fed, with expectations of a 0.25% cut. However, a worse-than-expected Initial Jobless Claims report overshadowed an uptick in the Producer Price Index. The odds for a 50-basis-point Fed cut have increased to 43%, further weakening the US Dollar. The University of Michigan also reported an increase in Consumer Sentiment to a four-month peak in September, driven by improved inflation expectations.
In Mexico, political turbulence has eased after the approval of the judicial reform bill. This has contributed to a more stable outlook for Mexico’s creditworthiness. The Director of Economic Research at Banxico mentioned the importance of a robust rule of law for encouraging investment and capitalizing on opportunities. The country’s economic docket for next week includes data on Aggregate Demand and Private Spending for the second quarter of 2024. Inflation in Mexico dipped below 5% in August, increasing the chances of additional easing by Banxico.
Technical analysis of the USD/MXN pair shows a shift in momentum, with the pair moving below the 20.00 psychological level. The Relative Strength Index has turned bearish, indicating a tilt to the downside in the short term. Key support levels lie ahead, with the first support at the August 23 low of 19.02. A breach of this level could expose further support levels. On the other hand, a bullish continuation would require the pair to clear the 20.00 level and potentially challenge higher resistance levels.
The Bank of Mexico, Banxico, plays a crucial role in setting monetary policy and preserving the value of the Mexican Peso. The central bank’s main tool for guiding monetary policy is by setting interest rates. When inflation is above target, Banxico will raise rates to control it. The central bank meets eight times a year and is influenced by decisions of the US Federal Reserve. The rate differential between the two countries is a key factor that impacts the strength of the Mexican Peso. Banxico’s decisions are aimed at maintaining low and stable inflation within target levels.
The Michigan Consumer Sentiment Index, released monthly by the University of Michigan, provides insights into consumer sentiment in the US. The index covers areas such as personal finances, business conditions, and buying conditions. A high reading on the index is bullish for the US Dollar, while a low reading is bearish. The survey is used as an indicator of consumer willingness to spend money, which is a significant driver of the US economy. The latest reading for the index showed an increase to a four-month peak in September, indicating positive consumer sentiment.
