Mexican Peso rises as Fed rate cuts are near

• Mexican Peso rallies sharply with USD/MXN falling over 2%.
• Mexico’s economy shows mixed signals, with Q2 GDP growth at 2.1% YoY but a contraction in economic activity, as Banxico debates the appropriateness of recent rate cuts.
• Powell's speech at Jackson Hole hints at upcoming rate cuts.

The Mexican Peso rallied sharply against the Greenback on Friday after Federal Reserve (Fed) Chair Jerome Powell announced that the central bank is ready to begin its easing cycle. This undermined the US Dollar, which is tumbling to a new yearly low, according to the US Dollar Index (DXY). Therefore, the USD/MXN collapses over 2% and trades at 19.06 after retreating from a daily peak of 19.53.

The USD/MXN extended its losses on Powell’s remarks, who said, “The time has come for policy to adjust.”

He added that the Fed is data-dependent regarding the size and timing of easing and added that he’s confident that inflation will hit the Fed’s 2% goal. Regarding achieving the maximum employment task, he said that risks are skewed to the upside.

After Powell’s speech, traders priced in a 33% chance of a 50-basis-point rate cut by the Fed at the September meeting. Meanwhile, the December 2024 fed funds rate futures contract shows market players expect 100 basis points of easing in 2024.

Meanwhile, Mexico’s economic docket remained absent on Friday. Yet Thursday’s data proved that the country grew 2.1% YoY in the final Gross Domestic Product (GDP) reading for the second quarter of 2024. Regarding economic activity, used by the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) as a measure of growth, the economy contracted at a -0.6 % pace, missing estimates and May’s data, each at 0.9% and 1.6%, respectively.

On Thursday, Banxico revealed its last meeting minutes, in which the central bank lowered rates to 10.75%. The minutes revealed that while “the inflation outlook still calls for a restrictive monetary policy,” the “significant progress” on inflation suggested it was appropriate to “reduce the level of monetary restriction.”

Deputy Governors Jonathan Heath and Irene Espinosa, who voted against the rate cut, expressed concerns that jeopardizing the credibility of the Mexican central bank could be detrimental.

Daily digest market movers: Mexican Peso bolstered by Powell’s dovish tilt

• Mexico’s mid-month inflation in August dipped from 5.61% to 5.16%, less than economists estimate at 5.31%. Core inflation dropped below the 4% threshold, decreasing from 4.02% to 3.98% YoY, below expectations of a 4.06% increase.
• Given Mexico’s fundamental backdrop of economic deceleration and inflation aiming lower, it could open the door to further easing by Banxico despite the split decision witnessed in August.
• Reuters cited sources who said Mexico’s data and the Fed’s commencement of its easing cycle increase the odds of the Mexican central bank cutting interest rates again in September.
• If the Fed aggressively lowers interest rates, it could boost the Mexican Peso prospects, and the USD/MXN could drop below the psychological 19.00 figure.
• After Powell’s speech, other Fed officials crossed the newswires. Philadelphia Fed’s Patrick Harker said the Fed needs to move rates down methodically. Chicago Fed’s Austan Goolsbee added that policy is at its tightest restrictive level and that the Fed’s focus is shifting towards achieving the job mandate.

Technical outlook: Mexican Peso appreciates as traders push USD/MXN toward 19.00

The USD/MXN remains upwardly biased, yet a double top formation looms. Momentum is shifting to the downside, yet the Relative Strength Index (RSI) remains in bullish territory.

If USD/MXN edges below 19.00, this could exacerbate a leg-down toward the August 19 low of 18.59 on further weakness, the pair could test the 50-day Simple Moving Average (SMA) at 18.45, followed by the psychological 18.00 mark.

On the other hand, if buyers keep the USD/MXN above 19.00, that could pave the way for a consolidation. If the pair clears the 19.40 mark, look for a move toward the 20.00 figure before testing the year-to-date (YTD) high at 20.22.