The Mexican Peso finds itself in a precarious position, trading sideways near three-week lows, as market attention firmly focuses on the Bank of Mexico’s (Banxico) upcoming monetary policy decision.
The Federal Reserve’s actions on Wednesday have cast a significant shadow over the peso’s performance. The Fed’s so-called “hawkish cut” – a rate cut that was accompanied by an overall hawkish tone in its monetary policy statement and Chairman Jerome Powell’s press conference – provided a boost to the US Dollar across the board. The central bank not only cut rates by 25 basis points to the 4.25%-4.50% range but also raised its inflation and growth expectations for next year and signaled a more gradual easing path. This led to the US Dollar Index (DXY) surging to test two-year highs, and the resulting risk-averse sentiment sent US Treasury yields rallying as well.
In Mexico, the peso’s woes have been compounded by uninspiring economic data. Retail Sales in October dropped unexpectedly by 0.3%, contrary to expectations of an increase. While the yearly decline in retail consumption moderated, it still didn’t meet market expectations. Analysts anticipate that the Bank of Mexico will follow the Fed’s lead and cut rates by 25 basis points to 10% later on Thursday, which would mark the fifth rate cut this year. There are further expectations of additional cuts in 2025, with the market forecasting a total reduction to 8.5%.
Monetary policy divergence between the US and Mexico is likely to continue weighing on the peso. As the Fed’s stance projects a stronger US economy with revised growth figures and fewer expected rate cuts next year, compared to previous estimates, the Mexican economy is seen slowing down to a 1.6% yearly growth in 2024 and 1.2% in 2025. Market analysts even expect the US Dollar to appreciate to 21.00 Mexican Pesos next year.
From a technical perspective, the USD/MXN currency pair has broken above the top of the last two weeks’ horizontal channel at 20.30 and is currently consolidating gains below the 20.40 area, with the December 2 high at 20.60 within sight. Technical indicators suggest increasing bullish momentum, as the price action remains above the 4-hour 100 Simple Moving Average (SMA) and the Relative Strength Index (RSI) is still below overbought levels. Support levels are identified at the top of the previous two weeks’ channel at 20.30, with the key 20.00 level also acting as a potential support. On the upside, resistances are present at 20.60, followed by the November 6 and 26 highs at 20.80.
As the market awaits the Banxico’s decision, the Mexican Peso remains in a state of flux, with its performance closely tied to both domestic economic developments and the broader monetary policy landscape shaped by the actions of the Federal Reserve.
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