Mexican Peso rallies sharply against the US Dollar amid Fed’s official comments

• Mexican Peso advances against the US Dollar, USD/MXN threatens 17.05 support area.
• Mexico’s economic docket ahead includes Retail Sales on Wednesday, followed by Thursday’s inflation data.
• US housing data was solid but failed to move the needle in favor of the US Dollar, which remains on the defensive.

The Mexican Peso continues to strengthen against the US Dollar during the North American session on Tuesday, as the Greenback (USD) remains pressured despite US Federal Reserve (Fed) officials pushing back against aggressive bets suggesting the central bank would lower rates by more than 100 basis points next year. Therefore, the USD/MXN trades at 17.10, down 0.32% on the day.

Mexico’s economic calendar remains scarce on Tuesday but will gather attention on Wednesday with the release of Mexican Retail Sales for October. On Thursday, the calendar will feature mid-month headline and underlying inflation data for December. Across the border, the solid housing data from the United States (US) did little to nothing to help the Greenback, which, according to the US Dollar Index (DXY), has dropped to a new two-day low of 102.10.

Daily digest market movers: Mexican Peso extends gains despite  Banxico’s dovish comments

• US Housing Starts rose by 14.8% in November, smashing October’s 0.2% expansion, while Building Permits as a whole contracted at a 2.5% rate, trailing October’s 1.8% growth. Although the data was solid, it was ignored by market participants.
• Recent comments from the Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja suggest the central bank would be cautious in setting monetary policy next year. She said they would remain data-dependent, and if the disinflation process continues, they could lower rates in the first quarter of 2024.
• Banxico’s Governor noted that despite reviewing their inflation projections for 2024, the central bank kept its forecast of inflation returning to its 3% target in 2025.
• Lastly, Victoria Rodriguez Ceja added the Governing Council considers several factors when determining its policy, including the exchange rate, though they’re not focused on a specific level.
• In Banxico’s last meeting, the central bank unanimously voted to hold rates at 11.25% and revised its inflation forecast for some quarters of 2024 and 2025.
• Even though US business activity gathered traction in December, as revealed by S&P Global PMIs, the markets would face a reality check on December 21, with the release of the Gross Domestic Product (GDP) for the third quarter expected to remain at 5.2% QoQ, above Q2’s 2.1%.
• Richmond Fed President Thomas Barkin said that inflation remains the main focus for the Fed, acknowledging there’s progress on curbing elevated prices. He said the Fed’s forecasts are now guidance, just projections, and added that the Fed could re-focus on its dual mandate
• According to the Summary of Economic Projections (SEP), Fed officials expect to lower the federal funds rates (FFR) to 4.60% in 2024, though they remain data-dependent.
• As of today, money market futures estimate the Fed will slash rates by 134 basis points toward the end of next year, three basis points lower than December’s 18 and twice the Fed’s forecasts of three 25 bps cuts for 2024, according to the SEP.

Technical analysis: Mexican Peso threatens critical technical area

The USD/MXN is trading sideways though tilted to the downside, as the 100, 200, and 50-day Simple Moving Averages (SMAs) begin to converge toward the 17.41/58 area, almost shifting flat. The downtrend is gathering pace, accelerating toward the bottom of the 17.00-17.60 range. A daily close below 17.00 would exacerbate a leg-down toward the year-to-date (YTD) low of 16.62, ahead of the end of the year.

Otherwise, if bulls regain the 100-day SMA at 17.41, the USD/MXN could edge toward the 200-day SMA at 17.51 in route to the 50-day SMA at 17.56. Once those levels are surpassed, further upside lies at the psychological 18.00 figure.