The Mexican Peso took a hit on Thursday as the Banco de Mexico (Banxico) hinted at faster interest rate cuts, potentially up to 150 basis points (bps), in upcoming meetings. This dovish shift has raised concerns about the interest rate differential between Mexico and the US, which could lead to further depreciation of the Peso.
According to data from the Instituto Nacional de Estadística Geografía e Informática (INEGI), inflation figures were mixed, with headline inflation coming in at 4.21% on an annual basis, below expectations. However, core inflation increased modestly to 3.65%, exceeding forecasts.
The Federal Reserve’s (Fed) December Meeting Minutes revealed a more conservative easing outlook, with officials opting for a 25-bps rate cut and signaling a potential slowdown in the pace of interest rate reductions.
As a result, the USD/MXN exchange rate climbed to 20.50, up 0.55%, as investors weighed the implications of Banxico’s dovish shift against the Fed’s more cautious approach.
Market Movers: Key Takeaways
– Banxico’s meeting minutes revealed a dovish tone, with officials suggesting larger downward adjustments could be considered in some meetings.
– The central bank improved the inflation outlook, citing progress in headline and core inflation, but acknowledged that services inflation decreased.
– INEGI data showed a mixed picture of inflation, with December’s Consumer Price Index (CPI) dipping below estimates and core CPI increasing above forecasts.
– The Fed’s December Meeting Minutes revealed a more conservative easing outlook, with officials opting for a 25-bps rate cut and signaling a potential slowdown in the pace of interest rate reductions.
Technical Outlook: USD/MXN Uptrend Remains Intact
The USD/MXN exchange rate remains heavy, with the uptrend intact as sellers failed to push the pair below the 50-day Simple Moving Average (SMA) of 20.29. If buyers clear the top of the range, the next resistance would be last year’s high of 20.83, followed by the current yearly high of 20.90.
Conversely, if USD/MXN tumbles below the 50-day SMA, the next support would be the 20.00 figure, ahead of the 100-day SMA at 19.93, followed by the 19.50 figure.
Conclusion
The Mexican Peso is under pressure due to Banxico’s dovish shift and the US Fed’s conservative outlook. The interest rate differential between Mexico and the US remains a key concern for investors, with the USD/MXN exchange rate likely to remain sensitive to developments in both countries’ monetary policy.
Source: FX Street
