Mexican Peso rallies to three-day high as traders anticipate Fed’s aggressive policy easing

• Mexican Peso advances due to investors expecting substantial US rate cuts, a headwind for the US Dollar.
• Mexico's higher-than-expected inflation and industrial production slump puts Banxico at a crossroads.
• USD/MXN retreats below 16.85 with traders eyeing a new multi-year low below 16.62.

The Mexican Peso (MXN) climbed during the North American session against the US Dollar (USD) due to investors increasing bets that the US Federal Reserve (Fed) would aggressively ease policy, pricing in more than 170 basis points of cuts. Therefore, the Greenback remains pressured, a headwind for the USD/MXN, which has dropped 0.31% to trade at 17.85 after hitting a three-day low of 16.82.

Mexico’s economic docket remains scarce, though the current week revealed that inflation was higher than expected in December, which could deter the Bank of Mexico (Banxico) from easing monetary policy in the first quarter. Nevertheless, higher interest rates are beginning to impact the country's industry as Industrial Production plunged, hurting growth prospects for 2024.

In regard to that, Mexican President Andres Manual Lopez Obrador entered the arena of economic projections, projecting that the economy would grow by 3.5%, exceeding the World Bank forecast of 2.6%.

Across the border, the US Department of Labor announced that prices paid by producers slipped in December, which triggered a repricing for additional rate cuts by the US central bank, consequently weakening the Greenback.

Daily digest market movers: Mexican Peso climbs on investor expectation of a dovish Fed

• The Producer Price Index (PPI) fell short of expectations, with the monthly PPI decreasing by -0.1%, which is below the forecasted 0.1%. In a YoY comparison, the PPI experienced a rise of 1%, which is also below the anticipated 1.9%. The core PPI remained unchanged at 0% compared to November's data, falling below estimates. Additionally, the YoY core PPI figures declined from the previous reading of 2% to 1.8%, also falling short of projections.
• Given the fact that Industrial Production plunged in Mexico, the scenario of the country is becoming uncertain, which could weigh on the Mexican Peso.
• On Wednesday, the World Bank revised its economic projections for Mexico in 2024. The updated forecast anticipates that Mexico's Gross Domestic Product (GDP) will grow by 2.6%, an increase from the bank’s initial prediction of 1.9%. Analysts at the bank attribute this expected growth to the rise in near-shoring activities, which they believe will positively impact the Mexican economy.
• Although the recent meeting minutes from Banxico (the Central Bank of Mexico) suggest that the central bank might contemplate easing its monetary policy, the inflation report for December could hinder any move toward policy relaxation.
• On Tuesday, Mexico's Consumer Price Index (CPI) recorded a YoY increase of 4.66% in December, surpassing the expected 4.55%. This is a significant jump from November's figure of 4.32%.
• Core inflation figures, which exclude volatile items like food and energy, showed a YoY increase of 5.09%, which was slightly lower than the consensus and the previous month's figures of 5.15% and 5.30%, respectively.
• On January 5, a Reuters poll suggested the Mexican Peso could weaken 5.4% to 18.00 per US Dollar in the 12 months following December.
• On Thursday, Fed policymakers reiterated that cutting rates in March is too soon, while adding that even though progress on inflation had been achieved, December’s data bucked the trend.

Technical analysis: Mexican Peso counterattacks as USD/MXN tumbles below 16.90

The USD/MXN pair resumed its uptrend after a bullish impulsive correction that lifted the spot price toward its weekly high of 17.07 before reversing course below the 17.00 figure. As the downtrend advances, the next key support levels to be tested would be August 28’s 16.69, followed by the 2023 low of 16.62.

Further upside will only be seen if buyers step in, pushing the USD/MXN exchange rate above 17.00. The first resistance would be 17.20, followed by the 50-day Simple Moving Average (SMA) at 17.20, ahead of challenging the confluence of the 100 and 200-day SMAs at around 17.39/40.

USD/MXN Price Action – Daily Chart