Mexican Peso soars after lower-than-expected US inflation data

• Mexican Peso strengthens against the US Dollar, with USD/MXN falling below 17.40 after a peak of 17.62.
• The USD/MXN decline is supported by speculation the Federal Reserve might halt its monetary tightening.
• US Treasury bond yields plunged after the US CPI report; traders eye Fed rate cuts in June 2024.
• Banxico’s Governor Victoria Rodriguez Ceja hinted at the possibility of rate cuts in Mexico, noting that any easing of monetary policy would be gradual and data-dependent.

Mexican Peso (MXN) rallies against the US Dollar (USD) as investors speculate the Federal Reserve (Fed) has finished tightening monetary policy following a softer-than-expected inflation report in the United States (US). The USD/MXN pair dropped below 17.40 after hitting a daily high of 17.62, and it is on the brink of challenging the 100-day Simple Moving Average (SMA) at 17.33 at the time of writing.

A scarce Mexico’s economic docket kept traders adrift to the release of October’s Consumer Price Index (CPI) in the US, with figures coming below estimates and previous readings, both annually and monthly. Core CPI also slowed down, prompting investors to buy riskier assets to the detriment of the US Dollar’s safe-haven status. Consequently, US Treasury bond yields are plunging, while traders are expecting the federal funds rate to hit 5% in June 2024.

Daily digest movers: Mexican Peso climbs as US inflation slows down, despite Banxico’s Rodriguez dovish remarks

• US October CPI rose by 3.2% YoY, below forecasts and the previous month’s rate, respectively at 3.3% and 3.7%. On a monthly basis, CPI inflation was 0%, way beneath consensus expectations and September’s rate, each at 0.1% and 0.4%.
• Core CPI inflation stood above 4% YoY, easing below September’s and the estimated 4.1%. On month-over-month readings, inflation cooled to 0.2%, beneath last month's and the forecast of 0.3%.
• Richmond Fed President Thomas Barkin said he’s not convinced inflation is on a smooth glide path to 2%. He fears more needs to be done to curb inflation.
• On Monday, Banxico’s Governor Victoria Rodriguez Ceja commented that the easing inflationary outlook could pave the way for discussing possible rate cuts. She said that monetary policy loosening could be gradual but not necessarily imply continuous rate cuts, adding that the board would consider macroeconomic conditions, adopting a data-dependent approach.
• The latest inflation report in Mexico, published on November 9, showed prices grew by 4.26% YoY in October, below forecasts of 4.28% and prior rate of 4.45%. On a monthly basis, inflation came at 0.39%, slightly above the 0.38% consensus and September’s 0.44%.
• Last Thursday’s hawkish remarks by the US Federal Reserve Chairman Jerome Powell sponsored the USD/MXN a leg up, toward 17.93, before paring some losses.
• Mexico’s economy remains resilient after October’s S&P Global Manufacturing PMI improved to 52.1 from 49.8, and the Gross Domestic Product (GDP) expanded by 3.3% YoY in the third quarter.
• Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%).

Technical Analysis: Mexican Peso surges with USD/MXN sellers eyeing a break below the 100-day SMA

The USD/MXN pair bias has shifted to neutral downwards in the short term, and the pair is on the brink of breaking crucial support levels like the 100-day Simple Moving Average (SMA) at 17.33, followed by the psychological 17.00 figure. A breach of those demand areas could open the door to testing the year-to-date (YTD) low of 16.62, printed in July.

On the other hand, if buyers keep the exotic pair above 17.33 and reclaim 17.50 in the near term, they could remain hopeful of testing key resistance levels, like the 200-day SMA at 17.65, ahead of the 50-day SMA at 17.70. Once cleared, the next resistance emerges at the 20-day SMA at 17.87 before buyers could lift the spot price towards the 18.00 figure.