Mexican Peso consolidates as traders await Fed interest-rate decision

• The Mexican Peso treads water near the 20.00 area as the US Dollar steadies ahead of the Fed decision on interest rates.
• Strong US economic data has boosted speculation that the Fed could scale back rate cut projections for 2025.
• Technically, the USD/MXN pair remains bearish but needs an extra boost to breach the 20.00 level.

The Mexican Peso (MXN) is practically flat on Wednesday, with US Dollar Index (DXY) steady near recent highs as investors bid their time ahead of the US Federal Reserve’s (Fed) monetary policy decision.

Investors are nearly fully pricing a 25 basis points (bps) interest-rate cut later on Wednesday. Nevertheless, the strong US economy and the higher inflationary pressures might prompt policymakers to raise their interest rate projections for 2025.

This sentiment has been boosting US yields and the US Dollar (USD) higher since last week, capping the near-term rally of the Mexican Peso below the 20.00 round level.

Beyond that, Mexican macroeconomic data have failed to cheer MXN buyers. Inflation eased beyond expectations in November, industrial output deteriorated and retail consumption dropped against expectations in October. These figures pave the path for a further rate cut by the Bank of Mexico (Banxico) on Thursday. 

Fears of a hawkish Fed underpin the US Dollar 

• The US Dollar Index (DXY) trades with moderate gains for the second consecutive day on Wednesday as investors brace for a “hawkish cut” by the Fed later today.
   
• US Treasury yields remain steady at one-month highs above 4.40%, buoyed by market expectations of fewer rate cuts in 2025.
   
• On Tuesday, US retail consumption increased by 0.7%, beyond expectations of a 0.5% increment, boosted by increasing vehicle and online sales
   
• These figures come after an unexpected improvement in US services sectors’ activity. The US preliminary Services Purchasing Managers Index (PMI) recorded its best performance in more than three years, with the PMI increasing to 58.5 from 56.1 in November and against expectations of a moderate slowdown to 55.7.
   
• Despite the recent upbeat US data, investors remain fully confident that the Fed will cut rates on Wednesday. The CME FedWatch tool shows a 95% chance of a 25 bps interest cut later today, with more than a 70% chance of less than three cuts during 2025.
   
• In Mexico, Retail Sales dropped unexpectedly by 0.3% in October, against expectations of a 0.2% increase. Retail Consumption moderated its yearly decline to 1.2% from 1.5% in the previous month against expectations of a 1.6% fall.
   
• A survey from Banxico published this week reveals that economic experts see prices growing at a 4.37% pace in 2024, down from the 4.42% inflation rate seen in November, while the expectations for 2025 remain steady at 3.80%.
   
• The country’s GDP is expected to grow by 1.60% in 2024, up from the previous 1.53%. However, expectations for 2025 have been downwardly revised to 1.12% from previous estimations of 1.20%, due to mainly the impact of tariffs from the US. 

Mexican Peso technical outlook: USD/MXN hovers above the 20.00 support area

USD/MXN is trading lower from its late November highs near 20.80, but the pair is struggling to find acceptance below the 20.00 psychological level.

Price action remains contained between the mentioned 20.00 level and 20.30 on the upside, awaiting the Fed later on Wednesday and Banxico’s decision on Thursday.

On the upside, above 20.30, the next target would be the December 2 high at 20.60 and November’s peak at around 20.80. Below 20.00, bears would be focusing on the October 24 and 25 lows and the November 8 low at 19.75.

USD/MXN 4-Hour Chart