The Mexican Peso has depreciated over 0.80% against the US Dollar as traders keep an eye on the Federal Reserve’s first rate cut in four years. Despite the Fed’s decision to lower rates by 50 basis points, the USD/MXN has maintained its earlier gains. Mixed data from Mexico in the second quarter, along with concerns over judicial reform, may reduce investment attractiveness and add to Peso volatility. As a result, the USD/MXN is currently trading at 19.26 after hitting a low of 19.06.
Federal Reserve policymakers decided to lower borrowing costs as they see inflation moving towards the bank’s 2% target. However, they also noted uncertainties in the economic outlook despite a balanced mandate for price stability and maximum employment. The Fed’s decision was not unanimous, with Governor Michelle Bowman favoring a smaller rate cut of a quarter percentage point.
The Summary of Economic Projections shows the Fed estimating interest rates to end at 4.4% in 2024 and 3.4% in 2025, with inflation projected to reach the 2% target by 2026. The US central bank also projects 2% economic growth in 2024, with an Unemployment Rate of 4.4% by the end of the year. Fed Chairman Jerome Powell reiterated that inflation risks have diminished and the economy remains strong post the rate cut.
Moving forward, the USD/MXN exchange rate is expected to be influenced by market sentiment and expectations for a larger Fed rate cut. Weak Mexican data, including a -0.4% contraction in Aggregate Demand in Q2, may continue to weigh down the Mexican Peso. Private spending in Q2 also declined by 0.6%, following a 1.8% expansion in Q1. On the other hand, US Building Permits in August grew by 4.9% MoM, and Housing Starts expanded by 9.6%.
In terms of technical analysis, the USD/MXN uptrend remains intact, with bulls gaining momentum as indicated by the RSI. If the pair climbs above 19.50, the next resistance levels are at 20.00 and 20.22. Conversely, if it drops below 19.15, key support levels include the August 23 daily low of 19.02 and the 50-day SMA at 18.99. Eyes are now on the Bank of Mexico (Banxico), which is expected to lower rates by 0.25% at the upcoming monetary policy meeting on September 26.
The Bank of Mexico, or Banxico, plays a crucial role in setting Mexico’s monetary policy and preserving the value of the Mexican Peso. By maintaining low and stable inflation within target levels of around 3%, Banxico aims to support a healthy economy. The central bank uses interest rates as a key tool to guide monetary policy, adjusting rates to control inflation and impact the attractiveness of the Mexican Peso for investors compared to the US Dollar.
Banxico holds eight meetings a year and often makes decisions based on policies set by the US Federal Reserve. This coordination helps the central bank react to changes in the global economic landscape and anticipate potential impacts on the Mexican economy. Through its strategic monetary policy measures, Banxico aims to stabilize the Mexican Peso, prevent capital outflows, and maintain a favorable investment environment in the country.
