The Mexican Peso (MXN) is gaining strength against the US Dollar (USD) following the release of US Core PCE inflation data that came in below estimates. This data suggests that inflation in the US is continuing to fall, solidifying expectations that the Federal Reserve will start an easing cycle. The Peso is further supported by a positive market sentiment, benefiting riskier assets as the week comes to a close. Despite this recent uptrend, the Peso has been experiencing a bearish trend in recent weeks due to factors such as slowing economic growth, political uncertainties, and expectations of interest rate cuts by the Bank of Mexico.
US Core PCE data for July showed a 2.6% annual increase in prices, slightly below the 2.7% forecast but on par with the previous month. The monthly data also indicated a 0.2% price increase, in line with estimates. Although the Peso is currently trading at 19.69 against the US Dollar, with EUR/MXN at 21.81 and GBP/MXN at 25.91, the overall outlook has been bearish due to various domestic and international factors.
The Mexican Peso is moving higher in response to an improvement in market sentiment, particularly after the US GDP for the second quarter was revised upwards to 3.0% growth. Additionally, US Initial Jobless Claims data came in lower than expected, signalling confidence in the economy’s ability to achieve a soft landing. However, the Peso is still facing headwinds from domestic challenges, as evidenced by the Bank of Mexico’s downward revision of GDP forecasts for 2024 and 2025. This suggests that the central bank may lower interest rates to support economic growth.
Analysts are predicting rate cuts by the Bank of Mexico before the end of the year, with different expectations on the magnitude and timing of these cuts. Political risks, such as proposed judicial reforms and diplomatic tensions with the US and Canada, could further weigh on the Peso’s performance. However, the Peso could benefit from the escalating trade war between North America and China, given its intermediary manufacturing role for Chinese goods entering North America.
In terms of technical analysis, the USD/MXN pair is trading higher within a rising channel, indicating a bullish trend. However, bearish divergence in the Relative Strength Index (RSI) suggests a lack of bullish strength in the rally, potentially leading to deeper downside corrections. Overall, the Mexican Peso’s performance is influenced by a combination of economic indicators, political developments, and market sentiment, with potential risks and opportunities on the horizon.
