USD/MXN extends downside to near 18.50 amid expectation of Fed rate cut

• USD/MXN extends the decline around 18.60 in Friday’s early Asian session. 
• The expectation of a Fed rate cut in September supports the Mexican Peso. 
• The Mexican Peso remains strong despite a surprise rate cut by Banxico last week.

USD/MXN trades in negative territory for the fourth consecutive day around 18.60 during the early European trading hours on Friday. The further downside of the pair is backed by the expectation that the US Federal Reserve (Fed) would cut at least a 25 basis point (bps) in September. Investors will monitor the preliminary US Michigan Consumer Sentiment Index for August, Building Permits, and Housing Starts, which are due later on Friday. Also, the Fed's Austan Goolsbee is set to speak. 

The upbeat US economic data on Thursday, including Initial Jobless Claims and Retail Sales, eased fears about a potential recession in the United States. However, traders are still expecting the Fed to cut its interest rate in September, which weighs on the Greenback in the near term. The market is now fully priced for a 25 basis points (bps) Fed rate cut in September and nearly 20% priced for a 50 bps cut, according to the CME FedWatch tool. 

The upside of the Mexican Peso occurred despite a surprise rate cut by Mexico’s central bank (Banxico) last week, lowering interest rates by 25 bps from 11% to 10.75%. Mexican economist Alexis Milo, former chief economist at HSBC México, noted, “The markets in the US are having their best day in more than a year, and that is allowing the peso to recover. This effect prevailed over the depreciation that we would have expected with a rate cut. ”