Mexican Peso strengthens for third day as US economic slowdown looms

• Mexican Peso registers gains third consecutive day, trading below 18.10 against the US Dollar.
• Weaker US economic data, including disappointing ADP Employment Change and rising unemployment claims, weigh on the Greenback.
• Bank of Mexico Deputy Governor Jonathan Heath echoes Fed's cautious stance on rate cuts, supporting the Peso.

The Mexican Peso extended its gains for the third straight day on Thursday after evidence that the US economy is slowing down weakened the Greenback. This ignited speculation that the Federal Reserve could begin its easing cycle this year, as some Fed officials commented that the dual mandate risks are more balanced. At the time of writing, the USD/MXN trades at 18.08, down 0.36%.

Mexico’s economic docket is light, yet the Peso was boosted by Bank of Mexico (Banxico) Deputy Governor Jonathan Heath, who wrote in an X post on Wednesday that he “agree[s] with Jerome Powell. More benign inflation data is needed before cutting rates. He said it for the Federal Reserve, but the same applies to the case of Mexico.”

Aside from this, US data on Wednesday disappointed investors. ADP Employment Change figures for June missed the mark and trailed May’s data, while the number of Americans filing unemployment claims rose, exceeding estimates and the previous week's data. This accentuated fears that the labor market is weakening, increasing the odds of a rate cut by the Federal Reserve.

Further data showed signs that the US economy is slowing as the ISM Services PMI plunged after hitting its highest level since August 2023, dived into contractionary territory,

Therefore, US Treasury yields tumbled, undermining the Greenback, which stands at 105.12 and is about to crack the 105.00 mark.

According to the CME FedWatch Tool, odds for a September 2024 cut lie at 66%, higher than a day ago's 63% chances.

Daily digest market movers: Mexican Peso rises further on US Dollar weakness

• Banxico’s survey showed that economists estimate the Gross Domestic Product (GDP) to end at 2%, down from 2.1%. They expect Banxico to cut rates from 11.00% to 10.25%, up from 10.00% projected in May.
• On Monday, Banxico Governor Victoria Rodriguez Ceja was dovish, as she said the evolution of disinflation can “allow us to continue discussing downward adjustments in our rate, and I consider that this is what we will be doing in our next monetary policy meetings.”
• Fed Chair Powell said the US economy made significant progress on inflation while adding that the risks of the Fed’s dual mandate are more balanced.
• US jobs data witnessed ADP Employment Change in June, creating 150K jobs, missing the estimated 160K and the prior month 157K; while Initial Jobless Claims for the week ending June 29 was 238K, exceeding estimates of 235K, and the previous reading of 234K.
• June’s ISM Services PMI plummeted to recessionary territory, from 53.8 to 48.8, the fastest pace in four years and its weakest since May 2020.

Technical analysis: Mexican Peso surges sharply as USD/MXN slumps below 18.10

The USD/MXN extended its losses to three consecutive days, with the pair clearing the next psychological support at 18.10, which exacerbated a test of the 18.05 figure earlier during the day. Momentum hints that buyers lost steam as depicted by the Relatives Strength Index (RSI), which points downwards about to pierce the 50-neutral line despite remaining bullish.

If USD/MXN drops further, the next target is the psychological level of 18.00. Breaking below this level would expose the next support at the December 5 high, which turned support at 17.56. Further decline aims for the 50-day Simple Moving Average (SMA) at 17.37.

Conversely, if buyers push the spot price above 18.50, it could rally toward the June 28 high of 18.59, potentially extending gains to challenge the year-to-date high 18.99.