Mexican Peso rallies as US jobs data fuels Fed rate cut expectations

• Mexican Peso gains 0.88% against the USD as USD/MXN trades at 18.59.
• Weaker-than-expected US labor data heightens expectations for a Fed rate cut in September.
• Banxico's Deputy Governor suggests gradual rate cuts amid Mexico's slowing economic growth.

The Mexican Peso regains some composure and rallies against the Greenback as market participants await the US Federal Reserve’s (Fed) monetary policy decision. A softer-than-expected labor market report in the US weighed on the US Dollar as market participants expect the first rate cut by the Fed in September. The USD/MXN trades at 18.59, down 0.88%.

On Wednesday, the Mexican economic docket was empty, yet traders shrugged off Tuesday’s data that showed the economy is decelerating. The Gross Domestic Product (GDP) for Q2 rose 0.2% QoQ, below estimates of 0.4% and a 0.3% increase in Q1. This justified comments by Omar Mejia Castelazo, a Deputy Governor at the Bank of Mexico (Banxico), who favors lowering rates gradually and emphasized that this would not mean the bank will embark on an easing cycle.

Across the border, US economic data showed that private hiring increased less than expected, according to Automatic Data Processing (ADP) Employment Change data for July.

Other data showed the Employment Cost Index (ECI) dipped three-tenths in Q2 2024, while Pending Home Sales bounced off record lows not reached since 2001.

In the meantime, traders are awaiting the US central bank decision, which is expected to keep rates unchanged for the eighth consecutive meeting, though they will be looking for signals that could reassure the market that the Fed will begin its easing cycle at the September meeting.

The CME FedWatch Tool shows odds for a 25-basis-point rate cut in September at 100%. Data from the Chicago Board of Trade (CBOT) shows that the December 2024 fed funds rates futures contract suggests that policymakers will ease policy at least 55 basis points.

Daily digest market movers: Mexican Peso appreciates as economy cools down

• Mexico’s National Statistics Agency revealed that GDP for Q2 2024 grew 2.2% YoY on its preliminary reading, above estimates of 2% and the previous quarter's 1.6% expansion.
• Mexico’s Deputy Finance Minister Gabriel Yorio said that public debt is expected at a level of 48.6% of GDP at the end of President Andres Manuel Lopez Obrador’s term.
• Last week, Mexico’s June Balance of Trade was $-1.073 billion, missing the consensus of $1 billion.
• US ADP Employment Change in July showed that private hiring rose by 122K, below the estimated 150K and missing the 155K created in June.
• The Employment Cost Index (ECI) decelerated from 1.2% to 0.9% QoQ, below forecasts of 1%.
• Pending Home Sales in the US increased 4.8% MoM in June, exceeding estimates of 1.5% growth following May’s -1.9% plunge.

Technical analysis: Mexican Peso recovers as USD/MXN drops beneath 18.60

The USD/MXN is forming a “bearish engulfing” candlestick pattern amid growing expectations that Fed Chair Jerome Powell and company will hint at the first interest rate cut at the September meeting.

The Relative Strength Index (RSI) shows momentum falling steeply, meaning sellers are moving in anticipation of the Fed’s decision. This and the USD/MXN clearing the June 28 peak at 18.59 could pave the way for a deeper pullback.

That said, USD/MXN's first support would be the 18.50 level. Once surpassed, the next stop would be the psychological 18.00 mark, followed by the 50-day Simple Moving Average (SMA) at 17.97.

On the flip side, if buyers lift the exotic pair above 18.60, that could sponsor a leg up toward the year-to-date (YTD) peak of 18.99 ahead of 19.00 per US Dollar. Further upside is seen at the March 20, 2023, high of 19.23, ahead of 19.50.