Mexican Peso on the defensive ahead of the Fed’s decision

• Mexican Peso opens the session soft as traders trim positions awaiting Powell and Co.
• Prices paid by producers in the US cooled down, adding to the dovish narrative around the Federal Reserve.
• USD/MXN could aim towards 18.00 if the Fed delivers a hawkish message.

Mexican Peso (MXN) weakened against the US Dollar (USD) early during the North American session on Wednesday, with traders bracing for the release of the US Federal Reserve’s (Fed) monetary policy decision. Speculations suggest the Fed will keep rates unchanged, but “some” uncertainty surrounds Chair Jerome Powell’s press conference. At the time of writing, the USD/MXN is trading at 17.40, gaining 0.58% on the day.

Mexico’s economic docket remains scarce, yet on Thursday, the Bank of Mexico (Banxico) will announce its verdict on monetary policy and is expected to keep rates unchanged. The latest Mexican economic indicators show the economy remains resilient, with inflation above the central bank’s target. In addition, PMIs remained at expansionary territory, and Industrial Production smashed estimates, portraying an optimistic economic outlook for the country.

Daily digest movers: Mexican Peso at the mercy of the Federal Reserve

• The USD/MXN main driver for the day will be the Fed’s decision, but traders' focus will be on the Summary of Economic Projections (SEP) and the dot plot.
• In September, the SEP showed that most Fed officials estimate the federal funds rate (FFR) to be at around 5.6% by the end of 2023. If policymakers keep the projections unchanged, that could be perceived as hawkish, and the USD/MXN could aim higher.
• Fed Chair Powell is expected to push back against speculations of looser monetary policy. Instead, he would stick to its previous stance of “we are prepared to tighten policy further if it becomes appropriate to do so.”
• The US Producer Price Index (PPI) inflation for November dipped in annual and monthly readings, in contrast to consumer inflation, which delivered mixed readings. The core Consumer Price Index (CPI) stands stubbornly at around 4%.
• Money market futures estimate the Fed will slash rates by 113 basis points toward the end of next year.
• A Reuters poll showed that 23 of 25 analysts expect the Bank of Mexico would keep rates at 11.25% unchanged, while one estimates a rate cut to 11%. Annual inflation ticked up to 4.32% in November, though it didn’t dent policymakers' intentions to ease policy next year if data confirms the disinflation process.

Technical analysis: Mexican Peso loses a step as the USD/MXN rises toward the 100-day SMA

The USD/MXN is neutral to upward biased despite sitting below key technical levels, like the 100, 200, and 50-day Simple Moving Averages (SMAs). Given the fundamental backdrop, if the Fed struck a hawkish message, the pair could rally and break each of the previously mentioned levels at 17.40, 17.54, and 17.64, respectively. Once cleared, the next resistance level would be the psychological 18.00 figure.

On the other hand, failure to reclaim the 100-day SMA could see sellers drag prices toward the 17.20 area, ahead of a strong demand region at around the 17.00/05 range. Once hurdled, the USD/MXN could test the year-to-date (YTD) low of 16.62.