Mexican Peso remains soft against US Dollar ahead US economic data release

Most recent article: Mexican peso trips down as inflation in the US boost the US Dollar

Mexican Peso slides vs. the US Dollar ahead of a busy week for Mexico and the United States.
Mexico’s economic docket will feature Industrial Production and the Bank of Mexico's monetary policy decision.
USD/MXN traders are awaiting the US inflation report alongside the Federal Reserve’s decision.

Mexican Peso (MXN) starts the week with a negative tone and loses traction against the US Dollar (USD) during the North American session. The economic docket during the week across both sides of the border will feature monetary policy decisions by the US Federal Reserve (Fed) on Wednesday and the Bank of Mexico (Banxico) on Thursday. Both central banks are expected to keep rates unchanged despite uncertainty about the Fed’s tone on their monetary policy statement. The USD/MXN is trading at 17.43, posting gains of 0.60% on the day.

Last week’s economic data from Mexico depicted the disinflation process continuing at a time when some of Banxico’s Governors had opened the door to ease monetary policy. However, they stressed that discussions will begin in the first quarter of 2024. Recently, Mexican President Andres Manuel Lopez Obrador said that more needs to be done to bring inflation down, adding that Banxico needs to focus also on economic growth, not just price stability.

Daily digest movers: Mexican Peso trades with losses at the beginning of a busy week

Mexico’s inflation on the producer and consumer side diverged. However, prices continue to ease, increasing the chances for rate cuts by Banxico, as Governor Victoria Rodriguez Ceja and Deputy Governor Jonathan Heath have suggested.
Nevertheless, there is a dissenter as Deputy Governor Irene Espinosa pushed back and said inflationary risks are growing.
China’s latest Consumer Price Index (CPI) report paints a deflationary scenario in the second-largest economy worldwide, spurring flows toward safe-haven currencies.
The US Dollar Index (DXY) is bolstering the USD/MXN pair, with the DXY gaining 0.10%, up at 104.09, underpinned by elevated US Treasury bond yields.
The US 10-year benchmark note rate is up three basis points at 4.262%.
US jobs market data was mixed, indicating the labor market is cooling down at a slow pace. Following last week’s US Nonfarm Payrolls report for November, traders slashed the odds for potential rate cuts by the US Federal Reserve for next year.
Ahead in the week, Mexico’s economic docket will feature Industrial Production for October and Banxico’s monetary policy decision on December 14.
On the US front, inflation figures on the consumer and producer side will be released ahead of the Federal Reserve’s last decision of the year. After that, the unemployment claims, Industrial Production, and Fed Regional Manufacturing Indices will be released.

Technical analysis: Mexican Peso on the defensive as USD/MXN climbs towards 17.50

The USD/MXN daily chart shows the pair is gathering upward momentum, above the 100-day Simple Moving Average (SMA) at 17.39, which could pave the way for further upside. Nevertheless, buyers must reclaim the 17.50 psychological figure so that the exotic pair can challenge the 18.00 mark. On its way toward the latter, buyers must regain the 200-day SMA at 17.54, followed by the 50-day SMA at 17.67.

Contrarily, if USD/MXN sellers drag prices below the 100-day SMA, they could remain hopeful the pair could slump further. The first support would be the 17.00/05 area, before challenging the current current’s year low of 16.62.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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