The Mexican Peso (MXN) is recovering early in the North American session after losing nearly 3.50% in the week due to risk aversion and the Federal Reserve's (Fed) hawkish rhetoric, as most officials expect another rate hike for 2023. The emerging market currency hit a four-month low at 17.8161 against the Greenback (USD) on Wednesday. Still, the looming central Bank of Mexico (Banxico) decision boosted Mexico’s currency, a headwind for the USD/MXN pair.
The latest economic data revealed the Mexican economy remains robust, benefiting from nearshoring opportunities after the COVID-19 pandemic. It should be said the country’s inflation remains “stable” thought in the upper band of Banxico's goal of 3% plus or minus 1%, at around 4.64% YoY in August. Nevertheless, the recent economic budget for 2024 raises analysts' eyebrows, as it projects an increase in the deficit to 4.9%. Speculations grow around the Mexican central bank's opinion and measures to consider the proposed budget.
The Mexican Peso found its foot after depreciating to 17.8161 versus the US Dollar, near the 200-day Simple Moving Average (SMA) at 17.8410, though it is staging a comeback and trimming some of its losses, currently below the 17.6000 area. Nevertheless, further upside is expected after printing a new cycle high, while the 50-day SMA reduces the distance to the 100-day SMA. Near-term, actual price action could be seen as a pullback, as the Relative Strength Index (RSI) aims lower, though the uptrend remains intact.
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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