The Mexican Peso has fallen for the second consecutive day against the US Dollar, as the USD/MXN pair hit a daily high of 18.33. This was driven by the rise in the Greenback, particularly against the Japanese Yen, which reached a 38-year high. Traders are anticipating crucial inflation data in the US, leading to a surge in the USD. The USD/MXN is now trading at 18.23, an increase of 0.73%.
The positive shift in sentiment occurred as Wall Street turned green, causing the USD/MXN pair to trim its gains after hitting the daily high. Investors are now awaiting the Bank of Mexico’s (Banxico) monetary policy decision on Thursday. Banxico is expected to keep interest rates unchanged at 11.00% following the sharp depreciation of the Mexican Peso post-election and the recent spike in mid-month inflation.
Federal Reserve (Fed) Governor Michelle Bowman’s hawkish comments have also supported the USD, contributing to the positive gains of the USD/MXN pair. Bowman stated that interest rates will remain steady for “some time” and hinted at the possibility of another rate hike if the disinflation process stalls.
Looking ahead, Mexico’s economic docket will feature the Balance of Trade for May and the Unemployment Rate on Thursday. The Citibanamex survey indicated that economists are pricing in fewer rate cuts by the central bank, with estimates suggesting rates will be lowered to 10.25% in 2024. The consensus for the USD/MXN exchange rate predicts it will end the year at 18.70.
From a technical analysis perspective, the USD/MXN uptrend is still intact, and the pair is expected to remain volatile leading up to Banxico’s decision. Momentum currently favors buyers, with the RSI showing a bullish outlook. Buyers will need to push the exchange rate past the psychological level of 18.50 to continue the bullish trend.
The Bank of Mexico, or Banxico, plays a crucial role in maintaining the value of the Mexican Peso and setting monetary policy. Banxico’s main goal is to ensure low and stable inflation within target levels. The central bank achieves this by adjusting interest rates, with higher rates aimed at curbing inflation. The rate differential between Banxico and the Fed influences the strength of the Mexican Peso.
Banxico meets eight times a year and closely monitors the decisions of the US Federal Reserve. By reacting to and sometimes preempting the Fed’s actions, Banxico aims to stabilize the Mexican Peso and prevent destabilizing capital outflows. After the Covid-19 pandemic, Banxico increased rates before the Fed to protect the Peso from significant depreciation and potential capital flight.
