Mexican Peso slumps as US Dollar stages comeback amid US inflation concerns

• Mexican Peso drops amid strong Dollar, fueled by ongoing inflation signs and upbeat consumer sentiment.
• Anticipation for Mexico's Retail Sales, Q4 GDP and mid-February inflation data could influence Banxico's policy direction.
• US PPI surge in January and positive consumer sentiment sponsor USD/MXN upside.

The Mexican Peso (MXN) depreciated against the US Dollar (USD) on Friday after data released in the United States (US) indicated that inflation is still high. A University of Michigan (UoM) poll suggests Americans see an improvement in economic conditions, while inflation expectations loom at around 2.9% and 3%. Therefore, some US Dollar strength pushed the USD/MXN pair up to trade at 17.06, gaining 0.14%.

Mexico’s economic docket will gather pace until next week, with the release of Retail Sales and the final Gross Domestic Product (GDP) figures for the last quarter of 2023. The  February inflation report will be greatly scrutinized by the Bank of Mexico (Banxico), which is eyeing the beginning of its easing cycle.

In the meantime, USD/MXN traders gathered cues on the release of January’s Producer Price Index (PPI) from the US, which exceeded estimates and previous readings, while Consumer Sentiment continued to improve.

Daily digest market movers: Mexican Peso on the defensive following US PPI data

• The US Bureau of Labor Statistics (BLS) disclosed that the January Producer Price Index (PPI) witnessed a MoM increase of 0.3%, surpassing expectations. Additionally, the core PPI, which excludes volatile food and energy prices, exceeded forecasts by rising sharply to 0.5% MoM, a significant increase from -0.1% in December. Over the 12 months leading up to January, the PPI rose 0.9%, which is lower than the previous month's figure. However, the core PPI for the same period increased by 2%, exceeding both the estimates of 1.6% and December's figure of 1.8%.
• US consumer sentiment improved slightly to 79.5 from 79.0 in January’s last reading, according to the UoM poll. Analysts foresaw an improvement to 80.0 on its preliminary reading.
• Inflation expectations in the US remained steady with one-year inflation at 3%, up from 2.9%, while for a five-year period it stood at 2.9%, unchanged.
• “The fact that sentiment lost no ground this month suggests that consumers continue to feel more assured about the economy, confirming the considerable improvements in December and January across various aspects of the economy," commented Surveys of Consumers Director Joanne Hsu in a statement.
• The US data release triggered a reaction in the USD/MXN, which was hovering near 17.04 before the data but soared to a daily high at 17.09 afterward. As traders digested the data, the exotic pair stabilized near the current exchange rate.
• Other data from the US revealed that Building Permits experienced a decline of -1.5%, moving from 1.493 million to 1.47 million. Simultaneously, Housing Starts saw a significant decrease of -14.8%, dropping from 1.562 million to 1.331 million.
• Market players are expecting the first rate cut by the Federal Reserve at the June monetary policy meeting as they have trimmed odds for March and May.
• US 10-year Treasury note yields climbed seven basis points to 4.315%, while the US Dollar Index (DXY) edged higher to 104.37, up 0.08%.
• At its latest monetary policy decision, Banxico revised its inflation expectations to the upside for the period from Q1 to Q3 of 2024, expecting inflation to converge toward 3.5% in Q4, based on the latest monetary policy statement.

Technical analysis: Mexican Peso stays firm and holds key level despite posting losses

As I wrote in a previous article, “the USD/MXN consolidated in the 17.05-17.10 area during the last couple of days, holding near the 50-day Simple Moving Average (SMA) at 17.09.” However, the pair has tilted toward the bottom of the range, with sellers aiming to push spot prices below the 17.05 figure. Once that level is cleared, there would be nothing on the way to challenge the psychological 17.00 figure before diving toward last year's low of 16.62.

Conversely, if buyers reclaim the 50-DMA, that could sponsor a leg up toward the current week’s high at 17.20-17.22. If those levels are taken, the USD/MXN could rally to the 200-day SMA at 17.29 before aiming toward the 100-day SMA at 17.39.

USD/MXN Price Action – Daily Chart