Mexican peso slips as crucial US inflation data looms

• The Mexican peso retreats after gaining more than 1.50% last week under pressure from weaker consumer confidence.
• Governor Banxico Rodriguez justifies the recent 25 bps rate cut amid a split 3-2 decision, citing the transitory effects of inflation.
• Market focus shifts to key US inflation and retail sales data, USD gains momentum ahead of releases.

The Mexican peso retreated on Monday after posting solid gains of more than 1.50% against the greenback last week, with the latter making decent gains ahead of a fraught economic plan in the United States. Meanwhile, consumer confidence in Mexico fell in July, which could be a prelude to the ongoing economic slowdown. USD/MXN trades at 18.96 and gains over 0.80%.

Mexico’s National Statistics Agency said consumers became less optimistic about the economic outlook and published the second-lowest reading since May’s 46.8, the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) said ).

In addition, Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja said in an interview with El Financiero that elements justified a 25 basis point (bps) cut to the main reference rate amid a decision split 3-2.

She acknowledged that while headline inflation reached 5.57%, she insisted it was unrelated to core prices, which fell for the 18th consecutive month and reached 4.05% in July.

“We expect these effects of the shocks we see in non-core inflation to be transitory, so we still expect headline inflation to return to target at the same time in late 2025,” Rodriguez noted.

USD/MXN depreciated following Banxico decision. However, traders are focused on the release of US inflation figures on Tuesday and Wednesday, followed by retail sales data from the University of Michigan (UoM) Consumer Sentiment on Thursday and Friday.

Daily Market Moments: Mexican peso tough on Banxico cut

• Banxico’s board revealed that the Consumer Price Index (CPI) is expected to rise to 5.2% in Q3 and fall to 4.4% in Q4, both readings for the rest of 2024. They expect that will reach 3% plus or minus 1.% target by Q4 2025.
• The Board updated its inflation forecast, indicating that headline inflation is expected to rise in the short term but remain unchanged in the longer term. Core inflation is expected to ease and fall below 4% in the fourth quarter of 2024.
• Mexico’s central bank acknowledged that inflationary risks remain tilted to the upside, while growth is tilted to the downside.
• The CME FedWatch tool puts the odds of a 50 basis point Fed rate cut at the September meeting at 47.5%, down from 52.5% last Friday.

Technical Analysis: Mexican peso depreciates as USD/MXN rises above 18.90

USD/MXN’s uptrend resumed on Monday after hitting a six-day low of 18.76, however traders pushed the exchange rate above 18.90 with buyers eyeing a test of the 19.00 psychological figure.

The Relative Strength Index (RSI) is above the neutral line of 50, suggesting that momentum favors buyers, which could push the exchange rate higher.

If USD/MXN breaks above 19.00, the next resistance would be 19.50, followed by the key 20.00 mark. A decisive break will expose the YTD high at 20.22, followed by the 20.50 mark.

Conversely, and in the most unlikely near-term scenario, USD/MXN’s first support would be the August 9 low of 18.76. If broken, the next area of ​​demand would be the June 28 peak at 18:59, followed by the psychological mark of 18:50.