Mexican Peso weakens against US Dollar following weak GDP, Banxico rate cut speculations

• Mexican Peso drops, reflecting concerns over Mexico's economic performance and potential Banxico rate cuts.
• Recent Mexican data shows inflation decline, GDP slowdown and significant drop in Retail Sales.
• Banxico minutes hint at possible easing in March with a shift toward a less hawkish monetary policy stance.

Mexican Peso loses steam for the second straight day against the US Dollar as market sentiment has shifted negatively. The Mexican currency is headed to end the week with losses after economic data witnessed inflation edging lower, the Gross Domestic Product (GDP) decelerating, and Retail Sales plummeting. At the time of writing, the USD/MXN exchanges hands at 17.14, up 0.20%.

The economic docket across the Bravo River is empty. Economic data revealed from Mexico showed the impact of higher interest rates set by the Bank of Mexico (Banxico). Although inflation dipped sharply in the first 15 days of February, the GDP for Q4 came in as expected at 2.5% YoY, exceeding forecasts but 0.8% lower compared to Q3 2023. Additionally, Retail Sales plunged, signaling that consumers reduced their spending.

In the meantime, Banxico’s latest minutes showed that the Governing Council could cut rates at the March 21 meeting as expressed by three of the five voting members. Two members added they can’t disregard maintaining rates at current levels. One of those members added he/she requires that underlying inflation shows a downward trajectory before beginning the easing cycle.

The language of the minutes was less “hawkish,” indicating a more flexible approach, according to analysts cited by El Economista. Analysts at Goldman Sachs commented that the Banxico Governing Council is tilting toward easing monetary policy unless exogenous shocks impact the USD/MXN exchange rate.

The USD/MXN has resumed its uptrend above the 50-day Simple Moving Average (SMA) following the release of last Thursday’s inflationary figures, while the sudden shift in Banxico’s rhetoric keeps the pair afloat above the 17.10 area.

Across the border, the Minutes of the US Federal Reserve (Fed) meeting showed that policymakers remain hesitant to cut rates amidst fears of a second round of inflation. Recently, the US Bureau of Labor Statistics (BLS) revealed that unemployment claims rose below estimates, while business activity, despite moderating, expanded.

Daily digest market movers: Mexican Peso hits seven-day low despite trimming some losses

• Mexico’s Consumer Price Index (CPI) in the first half of February dipped from 4.9% YoY to 4.45%, while core CPI slowed from 4.78% to 4.63% in the yearly data.
• GDP expanded in the fourth quarter by 0.1% QoQ but was lower than Q3’s 1.1% expansion. Annually based, GDP exceeded estimates of 2.4% and hit 2.5%, less than Q3’s 2023 3.3%.
• Mexico’s Retail Sales dropped -0.9% MoM, below estimates of 0.2%. Yearly figures plummeted -0.2% vs. a 2.5% forecast.
• The Mexican currency could depreciate further if the Mexican government fails to resolve its steel and aluminum dispute with the United States. US Trade Representative Katherine Tai warned the US could reimpose tariffs on the commodities.
• With no major events on the US economic calendar, recent unemployment claims figures and robust S&P Global Flash PMIs have backed Federal Reserve officials' hawkish remarks. Policymakers have expressed willingness to adjust policy when necessary but remain cautious, indicating no urgency to act. This stance is supported by current economic data suggesting strength in the economy, which could potentially revive inflationary pressures.
• Market players are expecting the first rate cut by the Federal Reserve at the June monetary policy meeting as they have trimmed odds for March and May.

Technical analysis: Mexican Peso extends losses to two-straight days as USD/MXN stays above 50-day SMA

The USD/MXN remains consolidated despite breaking above the 50-day Simple Moving Average (SMA) at 17.07. If buyers like to regain control, they must lift the exotic pair above 17.20, so they can threaten the 200-day SMA at 17.27. Once cleared, the 100-day SMA at 17.38 would be up next, ahead of the 17.50 figure.

On the other hand, if sellers step in and cap USD/MXN’s upside, they need to push prices below the 17.00 figure. Once cleared, the next support would be the current year-to-date (YTD) low of 16.78, followed by the 2023 low of 16.62.

USD/MXN Price Action – Daily Chart