Mexican Peso soars against US Dollar as US inflation cools

• Mexican Peso advances in aftermath of US inflation report, US yields declining becomes headwind for Greenback.
• Banxico Governor's optimistic outlook on inflation trajectory bolsters confidence, targets 3% by 2025.
• Market shrugs off US PPI data, reducing speculation on immediate Federal Reserve rate cuts.

The Mexican Peso rallies against the US Dollar on Wednesday as traders assess the latest inflation report from the United States (US). The drop in US Treasury bond yields acts like a headwind for the exotic pair. Alongside an improvement in market mood, this is a headwind for the USD/MXN pair, which trades below the 17.20 figure, aiming to regain the 50-day Simple Moving Average (SMA).

Mexico’s economic calendar is empty throughout the week with the exception of the Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja's interview earlier on Monday. She said inflation is expected to resume its downtrend and added that inflation would hit Banxico’s 3% target by 2025.

In the US the release of the Producer Price Index (PPI) was ignored by market participants, which had already dialed back odds for Fed rate cuts.

Daily digest market movers: Mexican Peso regains control amid soft US Dollar demand

• The US Bureau of Labor Statistics revealed December’s PPI, which came below the previous reading of -0.1% at -0.2%. In monthly data, the core PPI stood at -0.1%, suggesting that inflation is cooling down.
• The US Consumer Price Index (CPI) was lower than the previous month, though it exceeded estimates. Excluding volatile items, the so-called core CPI was unchanged, shy of the 4% threshold.
• Market players are expecting the first rate cut by the Federal Reserve at the June monetary policy meeting as they trimmed odds for March and May.
• US 10-year Treasury note yields erase some of yesterday’s gains and are down six basis points to 4.273%, while the US Dollar Index (DXY) dropped toward 104.71, down -0.13%.
• Mexico’s central bank revised their 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.
• Chicago Fed President Austan Goolsbee said, “It is totally clear that inflation is coming down,” even though the latest inflation report was high.
• Atlanta Fed President Raphael Bostic said the Fed must be resolute and added that he’s “laser-focused” on inflation. At the same time, Dallas Fed President Lorie Logan noted that there’s no urgency on cutting rates.

Technical analysis: Mexican Peso climbs as USD/MXN edges back above 17.15

The USD/MXN remains neutrally-biased, but short-term momentum favors sellers. The exotic pair tumbled below the 50-day Simple Moving Average (SMA) at 17.11. The Relative Strength Index (RSI) points downward, having crossed the 50-midline, which could open the door for additional downside. A daily close below that level could pave the way for further losses. The next support would be the 17.00 figure, followed by last year’s low of 16.62.

On the flip side, if buyers reclaim the 50-day SMA, that could pave the way for further upside, with the next resistance seen at the 200-day SMA at 17.29. Once cleared, the next resistance would be the 100-day SMA at 17.40.

USD/MXN Price Action – Daily Chart