- Mexican Peso rallies after dovish remarks from Fed Chair Powell.
- Powell highlights progress on US inflation, hints at balanced risks.
- Banxico Governor Rodriguez Ceja suggests possible future rate cuts as disinflation persists.
- Banxico survey adjusts GDP, policy outlook down, forecasts 2024 USD/MXN rate at 18.73 from 17.80.
The Mexican Peso advanced against most currencies on Tuesday, particularly the US Dollar, after Federal Reserve (Fed) Chairman Jerome Powell delivered remarks perceived as dovish by market participants. This punished the Greenback, which lost some 0.55% as the USD/MXN traded at 18.25 below its opening price.
Powell commented that the US economy made significant progress on inflation while adding that the risks of the Fed’s dual mandate are more balanced. His remarks came before the release of May’s JOLTs report, which came in hotter than expected.
Aside from this, the Mexican currency gained some traction even though Bank of Mexico Governor Victoria Rodriguez Ceja was dovish, adding that the progress 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.”
Mexico’s economic docket featured Gross Fixed Investment in April, which showed mixed readings between monthly and annual figures.
Meanwhile, Banxico’s latest survey of economic expectations showed that most private analysts have revised the Gross Domestic Product (GDP) and their monetary policy expectations downward. Regarding the USD/MXN exchange rate for 2024, economists lifted their forecasts from 17.80 to 18.73.
Daily digest market movers: Mexican Peso climbs despite expected economic deceleration
- 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.
- Mexico's Gross Fixed Investment increased in April from 0.8% to 0.9% MoM but missed estimates of 1.2%. On an annual basis, investment grew 18.1%, crushed March’s 3%, and exceeded forecasts for a 17.1% increase.
- US job openings rose in May from 7.919 million to 8.14 million, exceeding the 7.91 million projected by the consensus, revealed the US Bureau of Labor Statistics (BLS).
- US business activity in the manufacturing sector was mixed, according to S&P Global Manufacturing and the Institute for Supply Management (ISM). Traders are eyeing the release of the services sector on Wednesday.
- CME FedWatch Tool shows odds for a 25-basis-point Fed rate cut in September at 63%, up from 58% on Monday.
Technical analysis: Mexican Peso gains traction as USD/MXN slumps below 18.30
The USD/MXN failed to decisively crack the June 28 high of 18.59, which prompted market participants to sell the pair, which dropped below 18.30. Momentum is still in favor of buyers but aims lower, suggesting that in the near term sellers are in control.
If USD/MXN tumbles further, the next stop would be the psychological 18.00 figure. Once cleared, the next support level would be the December 5 high turned support at 17.56 before sliding toward the 50-day Simple Moving Average (SMA) at 17.37.
On the flip side, if buyers lift the spot price above 18.50, that will exacerbate a rally toward the June 28 high of 18.59 if they would like to extend their gains and challenge the year-to-date high of 18.99.
Fed FAQs
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.
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.
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.
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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