Mexican Peso advances fueled by Fed rate cut hopes

Mexican Peso is buoyed, sponsored by weak US data and cautious comments from Chair Powell.
Banxico Deputy Governor Heath mirrors Powell’s caution, advocating for clearer signs of benign inflation before rate cuts.
Disappointing US private hiring, rising unemployment claims, sharp drop in ISM Services PMI pressure Greenback.

The Mexican Peso skyrocketed against the US Dollar on Wednesday after data from the United States (US) fueled speculation that the Federal Reserve (Fed) might cut interest rates more aggressively than expected. That and Fed Chair Jerome Powell's remarks at the European Central Bank’s (ECB) Sintra Forum spooked investors, who ditched the Greenback. The USD/MXN trades at 18.11, down 0.76%.

Mexico’s economic docket was light as the Bank of Mexico (Banxico) revealed that the Foreign Exchange Reserve increased in May from April 2024. Additionally, Banxico Deputy Governor Jonathan Heath noted on X that he “agree[s] with Jerome Powell, more benign inflation data is needed before cutting rates. He said it for the Federal Reserve, but the same applies to the case of Mexico”.

US economic data disappointed market players after private hiring was lower than May’s but missed the mark. That, along with more Americans filing for unemployment benefits and the ISM Services PMI plunging after hitting its highest level since August 2023, weighed on the US Dollar as US yields dropped.

US Treasury yields fell as market participants began to price in additional rate cuts. According to the CME FedWatch Tool, odds for a September 2024 cut lie at 66%, higher than a day ago's 63% chances.

Daily digest market movers: Mexican Peso rises further on US Dollar weakness

Foreign Exchange Reserve in Mexico rose by $223 billion, exceeding April’s $221 billion and reaching an all-time high.
Banxico’s survey showed that economists estimate the Gross Domestic Product (GDP) to end at 2%, down from 2.1%. They expect Banxico to cut rates from 11.00% to 10.25%, up from 10.00% projected in May.
On Monday, Banxico Governor Victoria Rodriguez Ceja was dovish, as she said the evolution of disinflation can “allow us to continue discussing downward adjustments in our rate, and I consider that this is what we will be doing in our next monetary policy meetings.”
Fed Chair Powell said the US economy made significant progress on inflation while adding that the risks of the Fed’s dual mandate are more balanced.
US jobs data was released earlier, led by the ADP Employment Change, in June, which was 150K, below estimates of 160K and trailing May’s 157K.
After that, US Initial Jobless Claims for the week ending June 29 were 238K, exceeding estimates of 235K and the prior reading of 234K.
June’s ISM Services PMI plummeted to recessionary territory, from 53.8 to 48.8, the fastest pace in four years and its weakest since May 2020.

Technical analysis: Mexican Peso extends advancement as USD/MXN slumps below 18.20

The USD/MXN extended its losses to two straight days, with the pair clearing key support seen at 18.20, exposing the psychological 18.00 figure. Although momentum remains bullish, as depicted by the Relative Strength Index (RSI), buyers had lost traction while sellers continued to gain steam.

If USD/MXN drops further, the next target is the psychological level of 18.00. Breaking below this level would expose the next support at the December 5 high, which turned support at 17.56. Further decline aims for the 50-day Simple Moving Average (SMA) at 17.37.

Conversely, if buyers push the spot price above 18.50, it could rally toward the June 28 high of 18.59, potentially extending gains to challenge the year-to-date high of 18.99.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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