USD/MXN extends gains for the second day, trades higher to near 17.16

• USD/MXN gains ground as solid US labor data increases the possibility of no rate cut in March by the Fed.
• The recent remarks from the Fed suggest that the central bank is not inclined to pursue a rate cut in March.
• Market experts forecast a weakening of the Mexican Peso throughout 2024, citing uncertainties surrounding the economic policies.

USD/MXN continues its upward trend, reaching around 17.16 in the early European hours on Monday. These positive employment indicators contribute to the prevailing optimism regarding the likelihood of the US Federal Reserve refraining from interest rate cuts in the upcoming meeting. This sentiment has improved the US Dollar (USD) against the Mexican Peso (MXN).

US Nonfarm Payrolls increased by 353,000 jobs in January, surpassing the previous figure of 333,000 and surpassing the market consensus of 180,000. Additionally, Average Hourly Earnings (MoM) for January stood at 0.6%, exceeding the expected 0.3% and the December reading of 0.4%. The Unemployment Rate held steady at 3.7% in January, as compared to the market anticipation of 3.8%.

Recent statements from Federal Reserve officials suggest that the central bank is not inclined to pursue a rate cut in March. Jerome Powell, the Chair of the US Federal Reserve, has reiterated that implementing rate cuts during the March meeting could be premature. Additionally, Austan Goolsbee, President of the Chicago Federal Reserve (Fed) Bank, shared on Friday that he doesn't interpret the strong US job growth in January as a justification for postponing interest rate cuts. Rather, he sees it as a confirmation of the labor market's resilience, suggesting it is not on the brink of weakening.

Conversely, economists at MUFG Bank are anticipating a gradual weakening of the Mexican Peso (MXN) throughout 2024, citing uncertainties surrounding the economic policies that the next administration may adopt. The upcoming presidential election on June 2nd is expected to be won by Claudia Sheinbaum of the Morena party. Despite indications of policy continuity, there is a concern that Ms. Sheinbaum's authority could be limited by the influence of the incumbent president and other leaders within the Morena party.

In a similar vein, economists at CIBC Capital are maintaining their call for consecutive 25 basis points rate cuts starting in March. They also anticipate a later increase in the magnitude of rate cuts by the Bank of Mexico (Banxico) in late 2024, potentially bringing the overnight rate to 9.25% by the end of the year.