Mexican Peso tanks over 1% against USD ahead of inflation report

• Mexican Peso drops sharply, trading at 18.09, with market focus on upcoming inflation and GDP data.
• Mexico's economy decelerates, with retail sales missing expectations, fueling a bleak outlook.
• Banxico expected to cut rates by 25 basis points in August, with economists revising year-end USD/MXN forecast to 18.80.

The Mexican Peso dropped sharply during Tuesday’s North American session, losing more than 1.00% against the Greenback, which registers mild gains amid falling US Treasury bond yields. Market participants expect the release of Mexico’s mid-month inflation figures on Wednesday. This, along with the release of US Gross Domestic Product (GDP) and inflation data, could dictate the path of the Mexican currency. The USD/MXN trades at 18.12 after bouncing off daily lows at 17.90.

Mexico’s economy continued to decelerate in May, according to the Economic Activity Indicator, released by the Instituto Nacional de Estadistica, Geografia e Informatica (INEGI). Retail Sales for the same period missed the mark, creating a gloomy economic outlook.

Meanwhile, the Citi Research Expectations survey showed that all the economists polled expect a 25-basis point rate cut by the Bank of Mexico (Banxico) at the upcoming August meeting.

The consensus revised the USD/MXN exchange rate upward toward the end of the year, from 18.70 to 18.80. For 2025, they estimate the spot price to reach 19.40, unchanged from the last survey.

On the US front, market participants continued to diggest over-the-weekend developments, which saw US President Joe Biden step aside from the Presidential race and endorse Vice President Kamala Harris.

Aside from this, expectations that the US Federal Reserve’s (Fed) preferred gauge for inflation, the Core Personal Consumption Expenditure (PCE) Price Index, will continue to edge lower and increase the odds of a potential September rate cut by the Fed.

Besides that, the US economic docket will feature the release of US GDP data.

Daily digest market movers: Mexican Peso plummets amid strong US Dollar

• Citi Research Expectations survey shows that analysts estimate inflation to end at 4.30% YoY, up from 4.20%, while underlying inflation is foreseen to finish 2024 at 4.0%.
• Regarding growth, Mexico’s economy is expected to grow 1.9%, down from 2.0% in the last poll.
• Fitch Ratings reaffirmed Mexico’s BBB- rating with a stable outlook but noted that the proposed judicial reform could impact the country. The credit rating agency expressed uncertainty about the upcoming administration's ability to narrow the fiscal deficit, anticipated a slight economic downturn in 2025, and mentioned that trade tensions with the US could leave Mexico vulnerable.
• The US Dollar Index (DXY), which tracks the buck’s value against the other six currencies, edges up 0.14%, up at104.42.
• US Existing Home Sales were lower than expected yet failed to trigger a USD/MXN exchange rate reaction.
• The Richmond Fed Manufacturing Index plunged to -17 from -10, underscoring manufacturing weakness around the region.
• The CME FedWatch Tools show that the chances of a quarter-percentage-rate cut to the federal funds rate in September are at 96%.
• June consumer inflation figures were lower than expected in the United States, increasing the chances that the Federal Reserve would lower borrowing costs in 2024 by at least 50 basis points, according to the December 2024 fed funds rate futures contract.

Technical analysis: Mexican Peso tumbles as USD/MXN climbs above 18.00

The USD/MXN has reclaimed the 18.00 figure, and it seems to continue to edge higher after posting a ‘shooting star’ bear candle. Seller’s failure to cap spot prices beneath 18.00 could pave the way for a re-test of the June 28 peak at 18.59, but there would be some resistance areas between current levels and the latter.

The USD/MXN first resistance would be 18.50, followed by the aforementioned. In the outcome of a decisive break, the next resistance would be the year-to-date (YTD) high at 18.99.

Conversely, if USD/MXN retreated beneath 18.00, that would pave the way to challenge the 50-day Simple Moving Average (SMA) at 17.74, the first support level. The next support would be the latest cycle low of 17.58; the July 12 high turned support. A breach of the latter will expose the January 23 peak at 17.38.