Mexican peso rises as Powell signals Fed easing

• Mexican peso rises sharply, USD/MXN down more than 2%.
• Mexico’s economy is showing mixed signals, with second-quarter GDP growing at a 2.1 percent annual rate but a contraction in economic activity as Banxico debates the appropriateness of recent interest rate cuts.
• Powell’s Jackson Hole speech hints at future rate cuts.

The Mexican peso rallied strongly against the greenback on Friday after Federal Reserve (Fed) Chairman Jerome Powell announced that the central bank is ready to begin its easing cycle. That undermined the US dollar, which is falling to a new annual low, according to the US Dollar Index (DXY). As a result, USD/MXN is down over 2% and is trading at 19.06 after retreating from a daily high of 19.53.

USD/MXN extended losses following comments from Powell, who said: “The time has come for policy to adjust.”

He added that the Fed is dependent on data on the size and timing of easing and added that he is confident that inflation will reach the Fed’s 2 percent target. As for achieving the maximum employment burden, he said the risks are tilted to the upside.

After Powell’s speech, traders priced in a 33 percent chance of a 50 basis point interest rate cut by the Fed at its September meeting. Meanwhile, the December 2024 food funds rate futures contract shows market players expect 100 basis points of easing in 2024.

Meanwhile, Mexico’s economic record was absent on Friday. However, Thursday’s data showed that the country grew by 2.1% compared to last year in the final reading of the Gross Domestic Product (GDP) for the second quarter of 2024. In terms of economic activity, used by the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) as a measure of growth, the economy contracted at a rate of -0.6%, missing estimates and May data, each at 0.9% and 1.6%, respectively.

On Thursday, Banxico revealed its latest meeting minutes, in which the central bank cut interest rates to 10.75%. The minutes said that while “inflation prospects still call for a tight monetary policy”, “significant developments” in inflation suggested that “reducing the level of monetary restraint” was appropriate.

Vice Governors Jonathan Heath and Irene Espinosa, who voted against the rate cut, expressed concern that jeopardizing the credibility of Mexico’s central bank could be harmful.

Daily market reasons: Mexican peso supported by Powell’s dovish tilt

• Mexico’s mid-month inflation in August fell from 5.61 percent to 5.16 percent, less than economists’ estimate of 5.31 percent. Core inflation fell below the 4% threshold, falling from 4.02% to 3.98% YoY, below expectations of a 4.06% increase.
• Given the underlying backdrop of a slowing economy in Mexico and inflation targeting a decline, this could open the door for more easing by the Banxico, despite the split decision at which it took place in August.
• Reuters cited sources as saying that Mexico’s data and the Fed’s start of its easing cycle increase the chances that the Mexican central bank will cut interest rates again in September.
• If the Fed cuts interest rates aggressively, it could boost the Mexican peso outlook and USD/MXN could fall below the psychological 19.00 mark.
• After Powell’s speech, other Fed officials went through the news. Patrick Harker of the Philadelphia Fed said the Fed needs to methodically cut rates. Austan Goolsbee of the Chicago Fed added that policy is at its tightest level and that the Fed’s focus is on meeting the jobs mandate.

Technical Outlook: Mexican Peso Appreciates as Traders Push USD/MXN Towards 19.00

USD/MXN remains bullish, however a double top formation is looming. Momentum is shifting to the downside, but the Relative Strength Index (RSI) remains in bullish territory.

Should USD/MXN break below 19.00, this could exacerbate a decline towards the August 19 low of 18.59 on further weakness, the pair could test the 50-day simple moving average (SMA) at 18, 45, followed by the psychological mark of 18.00.

On the other hand, if buyers hold USD/MXN above 19.00, that could pave the way for a consolidation. If the pair breaks the 19.40 threshold, look for a move towards the 20.00 figure before testing the yearly (YTD) high at 20.22.