Mexican peso rises as US consumer turns pessimistic, Banxico eyes cut

• Mexican peso strengthens after US consumer confidence deteriorates.
• Inflation in Mexico fell below estimates in September, with core inflation falling below 5%, fueling expectations for a 25bps rate cut by Banxico on Thursday.
• Analysts expect Banxico to cut rates from 10.75% to 10.50%, citing lower inflation, weaker economic activity and Fed easing.

The Mexican peso advanced against the US dollar during the North American session after the Conference Board (CB) revealed that consumer confidence in the United States (US) had deteriorated. Meanwhile, Mexican inflation fell below estimates ahead of the Bank of Mexico’s (Banxico) monetary policy meeting on Thursday. At the time of writing, USD/MXN is trading at 19.36, down over 0.28%.

Inflation in Mexico in the first half of September fell in monthly and annual figures, according to the Instituto Nacional de Estadistica Geografia e Informatica (INEGI). Core numbers edged lower after breaching the 5% mark and improved from the previous reading.

According to Reuters, Banxico is expected to cut interest rates by 25 basis points (bps) on September 26 from 10.75% to 10.50%.

Analysts at Capital Economics quoted by Reuters noted that “Falling inflation, combined with weak economic activity and the fact that the US Fed is also easing monetary policy, means that Banxico is almost certain to offer another 25 basis points. cut.”.

Across the border, consumer confidence deteriorated in September, hitting its lowest level since August 2021 on worries about the labor market and the broad economic outlook.

Meanwhile, Fed Governor Michelle Bowman said risks to inflation were still prominent, adding that she favored “a measured pace of tapering” to avoid a rekindling of inflation.

Daily market reasons: Mexican peso tops as inflation eases

• Mid-month inflation in September came in at 0.09% month-on-month, below estimates of 0.15%. In the 12 months to September, it expanded 4.66%, below forecasts of 4.73% and the previous reading of 5.16%.
• Core inflation for the same period rose slightly from 0.1% to 0.21% monthly, but was below forecasts of 0.23%. Annually, core prices fell from 3.98% to 3.95%, less than the consensus.
• Mexico’s economic activity expanded in July, while retail sales contracted for a third straight month, but improved from June’s reading.
• Banxico is expected to cut borrowing costs by 175 bps by the end of 2025, according to swap markets.
• CB consumer confidence fell in September from 105.6 to 98.7, missing the 103.8 level expected by analysts.
• Dana Peterson, chief economist at the Conference Board, said: “The deterioration in the main components of the index likely reflected consumer concerns about the labor market and reactions to fewer hours, slower wage growth, fewer job openings.”
• Market participants have fully priced in a 100% chance of a 25 bps rate cut by the Fed. However, the odds for a 50bps easing are 56.2%, according to the CME FedWatch Tool.

USD/MXN Technical Analysis: Mexican Peso Recovers Some Ground as USD/MXN Falls Below 19.40

USD/MXN remains intact despite consolidating around the 19.00-19.50 range for the seventh straight day. Investors appear to be waiting for Banxico’s decision, although an “upward wedge” is forming, implying additional downside.

The Relative Strength Index (RSI) suggests that sellers are gaining momentum as the RSI reaches below its neutral line. Therefore, the path of least resistance is skewed to the downside.

If USD/MXN breaks below the September 23 low of 19.29, it will expose the confluence of the 50-day simple moving average (SMA) and the September 18 low near 19.08 to 19.06.

Conversely, if USD/MXN remains above 19.30, the next resistance will be 19.50, followed by the August 6 high at 19.61. Once released, the 20.00 level will follow, followed by the year-to-date (YTD) high at 20.22.