Mexican Peso recovers ahead of FOMC meeting minutes

• Mexican Peso registers gains with USD/MXN trading at 16.62, down 0.08%.
• Fed officials are cautious about rate cuts, echoing Chair Powell's ‘higher for longer’ policy.
• The Citibanamex survey shows most analysts expect a Banxico rate cut on June 27.

Mexican Peso registers gains against the US Dollar on Wednesday during the North American session ahead of the release of the minutes of the last Federal Reserve (Fed) monetary policy meeting. That and the recent Fed officials' hawkish commentary keep the Peso down on the week. The USD/MXN trades at 16.62, down a minimal 0.08%.

Following the April 30-May 1 Fed meeting, Fed Chair Jerome Powell opened the door to keeping interest rates higher for longer. Most Fed officials echoed his words, adopting a cautious stance regarding cutting borrowing costs.

TD analysts wrote, “The minutes from the most recent FOMC meeting are likely to grab attention next week following the Committee’s decision to communicate that ‘higher for longer’ remains the policy of choice in the near horizon.”

Across the border, the May Citibanamex survey showed that 26 analysts estimate the Bank of Mexico (Banxico) will lower rates at the upcoming meeting on June 27. Eight estimate the Mexican central bank will lower rates until the second half of 2024.

Inflation expectations for 2024 were revised upward from 4.17% to 4.21%, while underlying prices are expected to fall from 4.10% to 4.07%.

Daily digest market movers: Mexican Peso stabilizes amid diverging views on Banxico’s Governing Council

• On Tuesday, Mexico’s docket featured the Economic Activity Indicator for April, which revealed that the economy slowed, according to non-seasonally adjusted figures on a yearly basis.
• On Thursday, Mexico’s economic docket will feature the announcement of the Gross Domestic Product for Q1 2024 and mid-month inflation data for May. Banxico will also reveal monetary policy minutes from its latest meeting.
• Mexico’s Gross Domestic Product for Q1 2024 is expected to show the Mexican economy is slowing amid higher borrowing costs of 11.00% set by Banxico due to fears of higher inflation and the risks of Peso depreciation.
• Diverging views surfaced in Banxico. Governor Victoria Rodriguez Ceja said last Monday that the bank would discuss lowering rates in the upcoming meeting on June 29. Conversely, Deputy Governor Espinosa commented that lowering rates in March might have delayed inflation convergence toward the central bank’s target by two quarters.
• On Tuesday, Fed officials made some comments. Atlanta Fed President Raphael Bostic said he isn’t in a hurry to reduce rates and prefers to keep them steady. Later, Fed Governor Christopher Waller said that April’s CPI showed progress but that he needs to see several months of good inflation data before supporting a rate cut. His colleague, Vice-Chair of Supervision Michael Barr, commented, “We still need to finish the job on inflation.”
• Data from the Chicago Board of Trade shows investors are expecting 31 basis points (bps) of Fed easing toward the end of the year.

Technical analysis: Mexican Peso counter attacks as USD/MXN hovers near 16.63

The USD/MXN remains in a downtrend, though it seems to have bottomed out at around the 16.52/54 area during the week. The exotic pair has broken the 16.60 resistance level. Sellers’ momentum stalled as depicted by the Relative Strength Index (RSI), which stands in bullish territory but flat.

If buyers lift the USD/MXN toward the 50-day Simple Moving Average (SMA) at 16.76, it could exacerbate a rally toward the 100-day SMA at 16.91. Once cleared, the next supply zone would be the 17.00 psychological level. In that event, the next stop would be the 200-day SMA at 17.17.

Conversely, a drop below 16.52 could exacerbate a challenge of the 16.50 psychological level, ahead of the year-to-date low of 16.25.