Mexican Peso struggles as US economic data fuels Fed rate cut speculation

• Mexican Peso weakens close to 0.2% after disappointing US job figures and service sector contraction.
• Mexico's Gross Fixed Investment shows mixed results; Private Consumer Spending continues to grow, signaling economic strength.
• Bank of Mexico's latest poll anticipates inflation at 4.2% by 2024, with the Mexican economy expected to grow by 2.25%.

The Mexican Peso failed to hold to earlier gains versus the US Dollar on Friday after a softer-than-expected employment report in the United States (US) reignited speculation that the Federal Reserve (Fed) might lower interest rates as the jobs market weakened. Furthermore, US business activity in the services sector shows signs of contraction, which bolstered the Greenback to the detriment of the Mexican currency. The USD/MXN trades at 17.01, up by 0.20%.

Mexico’s economic schedule revealed that Gross Fixed Investment trailed in the twelve months to February data but increased in monthly figures. Further data revealed that February’s Private Consumer Spending grew in monthly and yearly figures, an indication of the economy's robustness.

Meanwhile, the Bank of Mexico (Banxico) April poll showed that private economists estimate inflation to end at 4.2% in 2024, underlying prices at 4.1%, and the economy to grow by 2.25%. Regarding the USD/MXN, analysts revised their projections downward from 18.10 to 17.

Across the border, the US Bureau of Labor Statistics (BLS) revealed that Nonfarm Payrolls in April missed the estimates and trailed the latest reading, underscoring the jobs market is cooling.

Other data revealed by the Institute for Supply Management (ISM) showed that business activity contracted for the first time since December 2022

Daily digest market movers: Mexican Peso on the back foot following soft US data

• Mexico’s Gross Fixed Investment in February rose 0.2% MoM, exceeding estimates of 0% and January’s 0.1% increase. On an annual basis, investment missed forecasts of 2.1%, dipping to 1.6% from 2.5%.
• Mexico’s Private Consumer Spending rose by 0.6% MoM in real terms. Annually, spending grew 3.9% in non-seasonally adjusted terms.
• Last week, Banxico Governor Victoria Rodriguez Ceja said the central bank would be data-dependent. However, weak GDP data could lead to a “live meeting” on May 9.
• The US Nonfarm Payrolls came in at 175K, below the consensus of 243K and trailing March’s revised 315K figure. Further data showed the Unemployment Rate ticked up from 3.8% to 3.9%, while Average Hourly Earnings (AHE) missed the 0.3% estimate to 0.2%.
• The ISM April Services PMI dipped below the 50.0 expansion/contraction threshold and came at 49.4, beneath projections and March’s reading. Digging deep into the report, the Employment subcomponent cooled, while Prices Paid increased. This could prevent the Federal Reserve from cutting rates as inflation seems to be reaccelerating.
• On Wednesday, the Fed decided to keep the fed funds rate unchanged at 5.25%-5.50 %. They acknowledged that risks to achieving the Fed’s dual mandate on employment and inflation “moved toward better balance over the past year.” Although they said there’s progress on inflation, recent data shows that it has stalled.
• Fed policymakers said they would reduce the rate of shrinking its balance sheet beginning in June. This will be done by lowering the cap from $60 billion to $25 billion for the amount of Treasury maturities not reinvested every month.
• Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 5.045%, unchanged compared to Thursday.

Technical analysis: Mexican Peso tumbles as USD/MXN climbs above 17.00

The USD/MXN is recovering some ground, underscoring today’s Mexican Peso weakness, following the release of macroeconomic data in the US. On its way up, the exotic pair cleared key resistance levels that shifted to support as the pair edged above the 17.00 psychological figure.

If buyers extend the rally past the 200-day Simple Moving Average at 17.17, that could pave the way to test the weekly high of 17.24. The next key resistance levels would be the January 23 swing high of 17.38 and the year-to-date high of 17.92.

Conversely, if the pair tumbles below 17.00, the first support would be the 100-day Simple Moving Average (SMA) at 16.94, followed by the 50-day SMA at 16.81. Up next would be the 2023 low of 16.62.