The Mexican peso has pulled back slightly from the crucial 20.00 mark, affected by the strength of the US dollar in the lead-up to the Federal Reserve’s impending decision.
Recent strong US economic data has spurred speculation that the Fed might take a more hawkish approach even as it is expected to cut rates on Wednesday. This has led to an upward pressure on the US dollar and a corresponding impact on the peso.
In the broader context, the USD/MXN exchange rate has been on a downward trend, yet it requires additional impetus to break through the 20.00 level. The Mexican peso is currently trading within a narrow range on Tuesday, not far from the significant 20.00 threshold against the US dollar. Investors are adopting a wait-and-see attitude as they anticipate the crucial monetary policy announcements from both the Federal Reserve and the Bank of Mexico this week.
The release of the US preliminary S&P Global Purchasing Managers Index data on Monday showed an unforeseen improvement in services activity during December. The market is also preparing for a potentially robust consumption report for November, set to be released later in the day. These figures reinforce the narrative of the US economic outperformance and strengthen the argument for only gradual interest rate cuts by the Fed next year. This sentiment has curbed investors’ risk appetite, causing US Treasury yields to rise and bolstering the US dollar across various currency pairs.
In Mexico, retail consumption is projected to have picked up in October, although it remains significantly lower than the levels seen in the same month last year. Last week, both consumer inflation and industrial output data fell short of expectations, lending support to the likelihood of a 25 basis points rate cut by the Bank of Mexico on Thursday.
Daily Digest of Market Movers
The US Dollar Index is trading higher on Tuesday, nearing multi-week highs due to the increase in US Treasury yields and market expectations of a “hawkish cut” by the Fed on Wednesday. US Treasury yields have been steadily climbing. The benchmark 10-year yield has surpassed the 4.40% level, following a bounce from 4.13% early last week in a seven-day rally. The US preliminary Services PMI soared to 58.5 in December, its best showing in over three years, up from 56.1 in November and defying expectations of a moderate slowdown to 55.7. The US preliminary Manufacturing PMI contracted to 48.3 from 49.7 in November, but the composite data still indicates healthy economic growth in the final quarter of the year. Later today, US Retail Sales are forecast to have increased by 0.5% in November, up from 0.4% in the previous month. Excluding autos, consumption is expected to accelerate at a 0.4% pace, compared to 0.1% in the previous month. The CME FedWatch tool reveals that a 25 bps interest rate cut by the Fed on Wednesday is almost a certainty, with the market also anticipating one or two more such cuts next year. In Mexico, Retail Sales are expected to have risen by 0.2% in October, up from 0.1% in September. However, when compared to October last year, they are projected to decline by 1.6%. The Bank of Mexico is expected to reduce interest rates by 25 basis points on Thursday, bringing the rate down to 10.00%, as concerns mount about the potential impact of increasing US tariffs on the Mexican economy.
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