Mexican Peso trims some losses against US Dollar but remains soft after Fed minutes

Most recent article: Mexican Peso declines in the aftermath of Fed and Banxico’s meetings minutes

Mexican Peso recovered some ground amid Fed’s latest minutes were not dovish as traders expected.
Mexico's Manufacturing PMI dips to 52.0, exerting pressure on the Peso amid positive business confidence data.
USD/MXN recovers to over 17.00 after a dip, fueled by a rise in the US Dollar

The Mexican Peso (MXN) began the year on a lower note against the US Dollar (USD) after the exotic pair dipped to a three-month low on December 28 at 16.86. Even though US Treasury bond yields shifted negatively, the Greenback (USD) remains higher, consequently underpinning the USD/MXN pair. At the time of writing, the exotic pair trades in the 17.03 area, posting a minuscule gain of 0.03%.

The minutes indicate that most Federal Reserve officials believe interest rates are approaching or have reached their peak. However, they noted uncertainty regarding the duration for which the restrictive policy should be sustained. Despite observing some improvements in inflation, they acknowledged that core services prices remain high. It was also mentioned that some officials might favor maintaining the current interest rates longer than initially expected.

On Tuesday, Mexico’s economic docket featured the S&P Global Manufacturing PMI for December, which printed 52.0, below November’s 52.5, and weighed on the Mexican currency. During the day, business confidence improved while USD/MXN traders digested economic data from the United States (US) revealed at around 15:00 GMT. However, market players await the release of the latest Federal Reserve’s (Fed) meeting minutes.

Daily digest market movers: Mexican Peso losses steam on positive US data

Business Confidence in Mexico improved from 54 in November to 54.6, though it failed to underpin the Mexican Peso, which remained weak during the session.
Commentary from Richmond Federal Reserve (Fed) President Thomas Barkin supported the US Dollar after he stated the US central bank is making real progress in taming inflation. He added that although the economy is headed for a soft landing, risks remain, adding that the potential for additional rate hikes is on the table.
US economic docket revealed the ISM Manufacturing PMI came in at 47.4, exceeding expectations of 47.1, while the prior reading was 46.7.
At the same time, the November Job Openings and Labor Turnover Survey (JOLTS) report rose less than estimates of 8.85 million to 8.79 million, while October’s figures were upwardly revised to 8.852 million.
Later, December’s Federal Open Market Committee (FOMC) minutes will be scrutinized by traders, following Federal Reserve Chairman Jerome Powell’s dovish pivot that fueled a stock rally towards the end of 2023. Fed officials estimate three rate cuts toward the end of December 2024, as depicted by the Summary of Economic Projections (SEP).
Money market futures data provided by the Chicago Board of Trade (CBOT) shows that traders remain confident the Fed would slash rates by 150 basis points towards the year’s end.

Technical analysis: Mexican Peso stays bearish despite USD/MXN buyers' effort

From a technical perspective, the USD/MXN remains bearishly biased, though sellers need a daily close below the November 27 low of 17.03 to increase their chances of pushing the price back below the 17.00 figure. Once achieved, that could pave the way to test the waters at around 16.86, ahead of falling toward last year’s low of 16.62.

On the flip side, if USD/MXN stays above the 17.00 figure, that could pave the way for a move toward the 17.37-17.43 area, the confluence of the 50, 100, and 200-day Simple Moving Averages (SMAs). If that area is surpassed, expect the USD/MXN to reach the psychological 17.50 area, ahead of the November 10 high at 17.93.

Also read: Mexican Peso Price Annual Forecast: Which factor would impact most in 2024, economics or politics?

USD/MXN Daily Chart

Central banks FAQs

What does a central bank do?

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%.

What does a central bank do when inflation undershoots or overshoots its projected target?

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.

Who decides on monetary policy and interest rates?

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%.

Is there a president or head of a central bank?

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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