Mexican Peso rallies as June inflation jumps unexpectedly

• Mexican Peso extended its gains as USD/MXN drops deeper beneath 18.00.
• Mexico’s CPI surged close to 5% in June, driven by rising food prices and Peso depreciation.
• Banxico's Deputy Governor Jonathan Heath labels inflation data as “very worrying,” indicating hawkish stance.

The Mexican Peso surged during Tuesday’s North American session as June headline inflation exceeded consensus. This might prevent the Bank of Mexico (Banxico) from slashing interest rates amid a domestic economic slowdown. At the time of writing, the USD/MXN trades at 17.93, down 0.40%.

Mexico’s economic docket featured the Consumer Price Index (CPI), which jumped close to 5% in June due to the rise in food prices, revealed the National Statistics Agency (INEGI). This and the Peso’s more than 6% depreciation in June triggered a price rise. Other data showed that Consumer Confidence slightly improved, while Auto Exports decelerated sharply.

After the data, Banxico Deputy Governor Jonathan Heath wrote on X that June’s inflation data was “very worrying.” Traders should be aware that he leans on the hawkish front of the central bank alongside Deputy Governor Irene Espinosa.

Market participants are eyeing the release of Banxico’s latest monetary policy meetings on Thursday, which are expected to show that the Mexican institution will be patient before lowering borrowing costs.

Across the border, Federal Reserve (Fed) Chair Jerome Powell appeared at the US Senate Banking Committee and stated that the disinflation process is evolving and that the risks of achieving the dual mandate have become more balanced. He added that Fed officials needed more good inflation data to cut interest rates. Nevertheless, an unexpected weakening in the labor market could be another reason for the easing of policy.

Daily digest market movers: Mexican Peso climbs on hot CPI data

• Some analysts in Mexico estimate the economy might slow down but dodge a recession, according to the National Statistics Agency’s (INEGI) Coincident Indicator. Despite that, they said reforms pushed by President Andres Manuel Lopez Obrador (AMLO), particularly the judiciary reform, could affect the country’s creditworthiness.
• Mexico’s CPI rose from 4.69% YoY to 4.98% in June, while core CPI dipped from 4.21% to 4.13% annually, exceeding the estimated 4.15%.
• Auto Exports in June slowed from 13% in May to 3.3% YoY in  June, while Auto Production decelerated from 4.9% to 3.8% in June.
• On Monday, the New York Federal Reserve revealed that consumer inflation expectations were lowered from 3.2% to 3% for one year.
• US CPI is foreseen dropping from 3.3% to 3.1% in the 12 months to June, while underlying inflation is projected to stay firm at 3.4% YoY.
• US Dollar Index (DXY), which tracks the value of a basket of six currencies against the US Dollar, advances some 0.16% and is up at 105.17.
• According to the CME FedWatch Tool data, the odds for a September cut are 70%, down from 73% on Monday.

Technical analysis: Mexican Peso counterattacks as USD/MXN dives below 18.00

The USD/MXN has hit a ten-day low of 17.91, yet it remains slightly above the June 24 cycle low of 17.87, which if broken could extend the Greenback’s losses. Momentum favors shorts as the Relative Strength Index (RSI) dropped below the 50-neutral line.

That said, If USD/MXN achieves a daily close below 18.00, the next support would be the June 24 swing low of 17.87. Further losses are seen beneath the 50-day Simple Moving Average (SMA) at 17.56, followed by the 200-day SMA at 17.26. The next floor level would be the 100-day SMA at 17.17.

For a bullish resumption, USD/MXN needs to surpass 18.10, followed by a rally above the June 28 high of 18.59, allowing buyers to challenge the YTD high of 18.99. Conversely, sellers will need to push the pair below 18.00, which could extend the decline toward the December 5 high-turned-support at 17.56, followed by the 50-day SMA at 17.37.