Mexican peso appreciates as US inflation data vindicates Fed rate cut

• The Mexican peso strengthens against the US dollar as core PCE inflation falls below expectations, boosting prospects for a Fed rate cut.
• Continued political uncertainty in Mexico dampens demand for the Peso.
• Banxico cuts GDP forecasts for 2024 and 2025, pointing to slower growth and potential rate cuts.

The Mexican peso rallied against the greenback on Friday after the Federal Reserve’s (Fed) preferred inflation gauge, the core price index for personal consumption expenditures (PCE), came in a tenth lower than expected, which suggests that the disinflation process has evolved. This gives the Fed the green light to start cutting rates, which is a headwind for the US dollar. At the time of writing, USD/MXN is trading at 19.64, down 1.01%.

Mexico’s economic record was lacking during the week. However, political uncertainty over judicial reform and the dissolution of autonomous bodies in bills promoted by President Andres Manuel Lopez Obrador could keep investors nervous as the new Mexican Congress takes office.

Apart from this, the Bank of Mexico (Banxico) is revising economic growth downward as it estimates that the Gross Domestic Product (GDP) for 2024 will decrease from 2.4% to 1.5% and from 1.5% to 1, 2% for 2025 after revealing its Q2 2024. quarterly review.

Banxico Governor Victoria Rodriguez Ceja warned that adjustments to prime benchmark rates will only be gradual when macroeconomic conditions permit.

In this regard, most banks expect Banxico to cut rates by at least 50 basis points (bps) for the rest of 2024. This would put pressure on the Mexican currency, which has already depreciated by 15.38% in the figures of year-to-date (YTD).

Across the border, the US Bureau of Economic Analysis revealed that the process of disinflation continues. The Fed’s favorite gauge of inflation, core PCE, edged down year-on-year, while the headline numbers were unchanged.

Meanwhile, the University of Michigan (UoM) consumer sentiment survey in August improved for the first time in five months and beat the preliminary reading announced two weeks ago.

The UoM survey showed that one-year inflation expectations fell, while five-year expectations remained unchanged.

Daily Market Motifs: Mexican peso fights back, shrugging off political uncertainty

• Mexican President Andres Manuel Lopez Obrador’s decision to cut ties with the US and Canadian ambassadors this week will continue to weigh on the Mexican peso.
• The US core PCE reading for July showed prices rose 2.6%, unchanged from the previous month, but less than estimates of 2.7% from a year ago. Core PCE came in at 2.5% YoY, below forecasts for 2.6% growth.
• The same report shows that consumer spending rose while income growth was sluggish, raising doubts that Americans will keep pace.
• According to the UoM, US consumer sentiment rose to 67.9 in August from 66.4 in July. One-year inflation expectations fell from 2.9% to 2.8%, and over the medium term — five years — stood at 3%.
• Data from the Chicago Board of Trade (CBOT) suggests the Fed will cut by at least 97 basis points (bps) under the December 2024 federal funds rate futures contract.

Technical outlook: Mexican peso rises as USD/MXN dips below 19.70

The USD/MXN uptrend remains intact, although the exotic pair fell towards the 19.65 mark as traders grow confident that the Fed will begin its easing cycle, narrowing the gap between US and Mexico interest rates.

The Relative Strength Index (RSI) is mixed, in bullish territory but aiming lower, showing that sellers have the short-term advantage.

On further USD/MXN weakness, the first support would be 19.50. A breach of the latter will expose the August 23 low of 19.02 before giving way to sellers eyeing a test of the 50-day simple moving average (SMA) at 18.59.

However, if the pair stays above 19.50, a challenge to the 20.00 figure is on the cards. Once this level is breached, the next stop would be the yearly (YTD) high at 20.22, followed by the September 28, 2022, daily high at 20.57. If these two levels are taught, the next stop would be August 2, 2022, swing high at 20.82, before 21.00.