Mexican Peso weakens after data signals economic slowdown

• The Mexican Peso is declining after Mexican GDP and Retail Sales data missed economists’ expectations.  
• The Banxico is now widely expected to cut interest rates in August, further weighing on the Peso. 
• USD/MXN is now in a short-term uptrend, with sights set on the June 28 high.

The Mexican Peso (MXN) is trading lower in its most heavily traded pairs on Wednesday after a string of macroeconomic data releases showed below-expectations growth and activity in Mexico. This, in turn, has increased bets the Bank of Mexico (Banxico) will cut its main interest rate at its meeting in August. Such a move would be negative for the Peso since lower interest rates reduce foreign capital inflows. 

Meanwhile, traders await the release of the latest Mexican inflation data on Wednesday, to further assess the likely outlook for monetary policy. 

At the time of writing, one US Dollar (USD) buys 18.20 Mexican Pesos, EUR/MXN trades at 19.73, and GBP/MXN at 23.48.

Mexican Peso falls after weak macroeconomic data weighs

The Mexican Peso is weakening in its main pairs amid signs the Mexican economy is slowing down. Disappointing retail sales figures have contributed to a bleak outlook for Mexico's economic activity. This, combined with expectations of a 0.25% interest rate cut by Banxico in August, has led to a downward revision for the Peso’s year-end forecasts. The USD/MXN, which gives the number of Pesos a single US Dollar can purchase, is now forecast to rise from 18.70 to 18.80, according to the Citi Research Expectations survey.

The latest Economic Activity Indicator from the Instituto Nacional de Estadistica, Geografia e Informatica (INEGI) underscores ongoing economic challenges. According to INEGI, Mexico’s economy expanded by 1.6% year-over-year (YoY) in May, a notable deceleration from the near-two-year-high increase of 5.4% recorded in the previous month. Despite this slowdown, the growth exceeded market expectations of a 1.4% increase, buoyed by robust performance in services. 

Retail sales for May grew by 0.3% from the same period in the previous year, significantly easing from a 3.2% increase in April. On a seasonally adjusted monthly basis, retail sales inched up by 0.1% following a 0.5% increase in April.

Adding to the economic uncertainty, Fitch Ratings reaffirmed Mexico’s BBB- rating but warned of potential impacts from proposed judicial reforms. Meanwhile, the International Monetary Fund (IMF) revised Mexico’s 2024 Gross Domestic Product (GDP) growth forecast down from 2.4% to 2.2%, citing a slowdown in manufacturing linked to reduced US economic activity. This has pressured Banxico to consider a more accommodative monetary stance.

Market participants are now focused on the release of Mexico’s mid-month inflation figures, scheduled for Wednesday at 12:00 GMT. Expectations are set for the mid-month Core Inflation Rate at 0.17% month-over-month (MoM) in July and at 4.01% YoY, down from 4.17% in June. The headline mid-month Inflation Rate is anticipated to rise to 0.38% MoM, with the YoY figure expected to increase to 5.26%, up from 4.78% in the previous month.

Furthermore, the Mexican Congress is set to discuss President Andrés Mañuel Lopez Obrador's judicial reform on August 1, in preparation for approval once the new Congress begins its term on September 1. This political development adds another layer of complexity to the economic landscape.

Technical Analysis: USD/MXN now targeting June 28 high at 18.60

USD/MXN found support at the 50-day Simple Moving Average (SMA) after completing an ABC correction lower, and has rebounded higher, hurdling the 18.00 barrier in the process. 

USD/MXN Daily Chart 

The short-term trend is now bullish for USD/MXN, and given that the “trend is your friend,” this still technically favors bullish bets over that timeframe. 

The next target higher for the pair is the key June 28 swing high at 18.60. 

Meanwhile, the direction of the medium and long-term trends remain in doubt.