In recent weeks, the Mexican Peso has found itself fluctuating within a narrow range, reaching levels reminiscent of a three-week low. This stability, or rather stagnation, has drawn considerable attention ahead of significant monetary policy announcements from the Bank of Mexico (Banxico). As the global economy witnesses pivotal movements, particularly with the stance of the Federal Reserve (Fed), understanding the intricacies surrounding the USD/MXN currency pair has never been more pertinent.
On Wednesday, the Federal Reserve’s decision to implement a “hawkish cut” sent shockwaves throughout currency markets, leading to a robust strengthening of the US Dollar. By lowering interest rates by 25 basis points to a range of 4.25% to 4.50%, the Fed simultaneously adjusted its future projections, suggesting a more aggressive rate reduction pathway than previously anticipated. Analysts highlighted an increase in the 2025 inflation expectations to 3.9%, indicating potential policy shifts that could influence market dynamics significantly. As the US Dollar Index (DXY) surged to levels not seen in two years, the broader implications for emerging markets like Mexico became increasingly clearer.
From a technical perspective, the USD/MXN currency pair has exhibited bullish momentum, surpassing the 20.30 level. This breakthrough indicates a potential bullish trend, with consolidation occurring beneath the 20.40 mark. The momentum can be further substantiated by examining critical indicators such as the Simple Moving Average (SMA) and the Relative Strength Index (RSI). Notably, the price resides above the 4-hour 100 SMA, suggesting a supportive environment for further gains. However, the RSI remains comfortably below overbought territory, indicating that the market may still have room to run before encountering resistance.
Looking towards Banxico’s decisive moment scheduled for Thursday, a consensus suggests a rate cut of 0.25% bringing rates down to 10%. This would mark the fifth reduction in 2023, with implications for the broader financial landscape apparent. Market analysts forecast a cumulative reduction of 150 basis points further into 2024, revealing concerns about Mexico’s economic growth trajectory. A Citi survey anticipates a slowdown in Mexico’s economy, with growth rates plummeting to approximately 1.6% in 2024 and 1.2% in 2025 in response to external pressures, including American inflationary policies resulting from President-elect Donald Trump’s anticipated economic strategies.
Adding to the narrative, recent data from Mexico indicates troubling signs within the retail sector. Unexpectedly, retail sales declined by 0.3% in October, conflicting with expectations for a modest uptick. While the year-on-year decline in retail consumption softened, it still emphasizes the challenges facing the household sector amidst a tightening financial backdrop. The sluggish performance can be viewed as a reflection of the broader economic climate, raising questions about domestic consumption and overall economic resilience.
As attentive analysts parse through the evolving data, sentiment appears to tilt toward a strengthened US Dollar, with projections suggesting it could appreciate to around 21.00 Mexican Pesos in the near term. This highlights the anticipated divergence between the Fed’s more resilient economic trajectory and Mexico’s slowing growth rates, potentially leading to heightened volatility in the MXN.
At this juncture, the interplay between the Mexican Peso and the US Dollar is shaped by a tapestry of interest rate policies, economic forecasts, and retail performance indicators. Observers will need to remain vigilant in monitoring developments as Banxico’s decisions unfold and as market reactions continue to materialize in response to the Fed’s maneuvers. The complexity of this relationship underscores the necessity of a nuanced approach to currency trading and economic forecasting, given the profound implications that lie ahead.