Mexican Peso remains steady near two-week lows following bright US data
|- The Mexican Peso is trading sideways near three-week lows, with all eyes on Banxico’s decision.
- Strong US GDP and Jobless Claims figures have provided additional support to the US Dollar..
- Technically, the USD/MXN is under an increasing bullish momentum above 20.30.
The Mexican Peso (MXN) is depreciating for the fourth consecutive day on Thursday. The pair keeps trading sideways right below two-week lows, at 20.40, as the upward revision of the US Gross Domestic Product and the decline of Jobless claims endorse the rhetoric of US economic exceptionalism.
The Federal Reserve (Fed) on Wednesday, delivered a hawkish cut on Wednesday, which coupled with the recent lacklustre data from Mexico, keeps the MXN on its back foot ahead of the Bank of Mexico’s (Banxico) monetary policy decision.
A poll of analysts released by Citibank revealed a widespread view that the Mexican central bank would follow the Fed’s steps and cut rates by 25 basis points (bps). The analysts underscore that the lower inflationary pressures and a softer economic outlook put pressure on Banxico to ease borrowing costs.
The Federal Reserve cut interest rates as expected, but its monetary policy statement and Chairman Jerome Powell´s press conference were tilted to the hawkish side. The central bank raised next year’s inflation and growth expectations and signaled a slower easing path.
Monetary policy divergence will likely weigh on the MXN
- The third quarter's US GDP has been revised higher to a 3.1% annualized growth from the previously estimated 2.8% increase.
- Beyond that Data from the labor Department revealed that Jobless Claims grew by 220K in the week of November 13, well below the 230K expected, following a 242K increase in the previous week.
- On Wednesday, the US Dollar Index (DXY) surged to test two-year highs following the Fed´s monetary policy decision, and it is likely to remain firm unless US data contrasts the Fed’s strong economic projections.
- The Bank of Mexico is widely expected to cut rates by 0.25% to 10% later on Thursday. This will be the fifth rate cut this year, with more expected to come in 2025.
- In the US, the Fed cut rates by 25 bps to the 4.25%-4.50% range on Wednesday, but the interest rate projections for 2025 were raised to 3.9% from 3.4%. This means two more rate cuts next year, instead of the four anticipated in September.
- The Fed lifted next year’s inflation expectations to 2.5% from the 2.1% estimated in September, with some analysts anticipating the impact of US President-elect Donald Trump’s inflationary policies.
- US economic growth was revised to 2.5% this year and 2.1% in 2025, from September’s forecasts of a steady 2.0% GDP this year and the next.
- The reaction to the US central bank’s decision boosted risk aversion and sent the US Treasury yields and the US Dollar rallying. The yield for the benchmark 10-year note surged to six-month highs above 4.50%, from 4.13% lows last week.
- In Mexico, Retail Sales dropped unexpectedly by 0.3% in October, against expectations of a 0.2% increase. Retail consumption moderated its yearly decline to 1.2% from 1.5% in the previous month, against expectations of a 1.6% fall.
- According to a survey from Citi, analysts expect Banxico to cut interest rates to 10.00% on Thursday and 150 bps further to 8.5% next year.
- The same survey reveals that market analysts expect the US Dollar (USD) to appreciate to 21.00 Mexican Pesos next year, with the Mexican economy slowing down to a 1.6% yearly growth in 2024 and 1.2% in 2025.
US Dollar PRICE This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Japanese Yen.
USD EUR GBP JPY CAD AUD NZD CHF USD 0.96% 0.22% 2.17% 0.94% 1.64% 1.94% 0.47% EUR -0.96% -0.68% 1.32% 0.05% 0.85% 1.05% -0.43% GBP -0.22% 0.68% 1.88% 0.73% 1.54% 1.72% 0.25% JPY -2.17% -1.32% -1.88% -1.23% -0.52% -0.21% -1.59% CAD -0.94% -0.05% -0.73% 1.23% 0.75% 0.99% -0.47% AUD -1.64% -0.85% -1.54% 0.52% -0.75% 0.20% -1.26% NZD -1.94% -1.05% -1.72% 0.21% -0.99% -0.20% -1.46% CHF -0.47% 0.43% -0.25% 1.59% 0.47% 1.26% 1.46% The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Mexican Peso technical outlook: USD/MXN stands at higher levels above 20.30
USD/MXN has broken above the top of the last two weeks’ horizontal channel at 20.30 and is consolidating gains below the 20.40 area, with the December 2 high at 20.60 on sight.
Technical indicators show increasing bullish momentum, with price action above the 4-hour 100 Simple Moving Average (SMA) and the Relative Strength Index (RSI) still below overbought levels.
Support levels are at the top of the last two weeks’ channel at 20.30, ahead of the key 20.00 level. On the upside, resistances are at the mentioned 20.60, ahead of the November 6 and 26 highs at 20.80.
USD/MXN 4-Hour Chart
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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