The Mexican peso rises on hopes of a 50 basis point Fed rate cut

• Mexican peso hits three-week high as US dollar falls.
• Fed rate cut expectations are rising, with the CME FedWatch tool showing a 43% chance of a 50bps cut, pressuring the US dollar.
• Political worries in Mexico are easing after judicial reform is approved, helping the peso’s rally.

The Mexican peso rebounded for the third consecutive session against the US dollar on the latter’s general weakness. Market participants gaining confidence that the US Federal Reserve (Fed) will cut borrowing costs “aggressively” boosted the Mexican currency, which dismissed fears over judicial reform. USD/MXN is trading at 19.25, down 1.30%.

The greenback has been the focal point in the past two trading sessions. On Thursday, investors appeared confident that the Fed will cut interest rates by 0.25% thanks to data from the CME FedWatch tool. However, a worse-than-expected initial jobless claims report overshadowed a rise in the producer price index (PPI).

On Thursday, the CME FedWatch tool showed the odds of a 50 basis point Fed cut were 28%. However, at the time of writing, the odds have increased to 43%; and for a 25 bps discount, it fell to 53%.

That undermined the greenback, which according to the US Dollar Index (DXY) lost 0.17% to change hands at 101.06.

The University of Michigan (UoM) revealed that consumer sentiment rose to a four-month high in September, which was helped by an improvement in inflationary expectations.

Meanwhile, in Mexico, political turmoil eased after the passage of the judiciary bill.

Gerardo Carrillo, regional director for LATAM at Fitch Ratings, commented on Mexico’s creditworthiness. He said: “The rating outlook is stable, which means we see a balance between strengths and weaknesses. Before we see an outright downgrade of the sovereign rating, what could be expected from us is a change in outlook, either from stable to positive or from stable to negative, the latter is likely to occur.”

On Thursday, Bank of Mexico (Banxico) economic research director Alejandrina Salcedo said a robust rule of law environment can help generate conditions that encourage investment. She added that upholding the rule of law and public safety “would provide greater security, stimulate the flow of investment in all regions and help capitalize on the opportunities offered by the resettlement process.”

Daily Market Reasons: The Mexican peso is supported by the weakness of the US dollar

• USD/MXN would continue to be driven by market sentiment and expectations for a further Fed rate cut.
• Mexico’s economic file next week will include aggregate demand and private spending for the second quarter of 2024.
• Inflation in Mexico fell below 5% in August, increasing the chances of further easing by Banxico.
• Citibanamex’s September survey showed that Banxico will cut rates to 10.25% in 2024 and 8.25% in 2025. The USD/MXN exchange rate is forecast to end 2024 at 19.50 and 2025 at 19.85.
• The UoM consumer sentiment index rose from 67.9 to 69.0, beating estimates of 68.
• Inflation expectations improved from 2.8% to 2.7% for the one-year period. In the long term, they increased from 3% to 3.1%.
• The greenback remained tender in the US after the US Bureau of Labor Statistics revealed that August’s PPI numbers were mixed. At the same time, the number of Americans who filed for unemployment benefits rose in line with estimates and cleared the previous week’s reading.
• Data from the Chicago Board of Trade suggests the Fed will cut by at least 98 basis points this year, down from 108 a day earlier, according to the December 2024 federal funds rate futures contract.

USD/MXN Technical Outlook: Mexican peso rises as USD/MXN dips below 19.30

USD/MXN’s sharp pullback has pushed the exotic pair over 7,000 pips below the psychological 20.00 mark, although key support levels are ahead. However, momentum shifted in favor of the sellers as the Relative Strength Index (RSI) turned bearish.

Therefore, in the short term, USD/MXN is tilted to the downside. The first support would be the minimum of August 23, 19.02. A breach of the latter will expose the 50-day SMA at 18.99, followed by the August 19 cycle low of 18.59.

Instead, USD/MXN needs to clear the psychological 20.00 figure for a bullish continuation. If broken, the next cap level would be the YTD high at 20.22. Next, the pair could challenge the daily high of September 28, 2022 at 20.57. If these two levels are surrendered, the next stop would be the swing high at 20.82 on August 2, 2022, before 21:00.