USD/MXN extends losses and nears the 11-month low, at 18.82
- The US Dollar remains offered amid higher hopes of Fed easing.
- Weak GDP and mixed Jobless claims figures offset the impact of the rate cut by the Bank of Mexico on Thursday.
- US PCE Prices Index data is expected to show that inflation remains at moderate levels.
The Mexican Peso is trading with marginal gains on Friday, appreciating for the fifth consecutive day and on track to a 2.4% weekly rally as the US Dollar weakness has offset the impact of a 50 bps rate cut by the Bank of Mexico.
The USD/MXN remains steady below the 19.00 level after dropping from Monday’s highs at 19.35 a few pips short of the 11-month low, at 18.82 hit in mid June, with alleyes on the US PCE Price Index release, due later today..
US Dollar weakness keeps driving markets on Friday. With the geopolitical tensions in the rear view, the focus has shifted back to the macroeconomic front, and recent US data coupled with the rift between the US president and the Fed chair, Jerome Powell are undermining confidence in the USD.
Soft US data fuels hopes of Fed rate cuts
On Thursday, the final reading of the US Gross Domestic Product revealed that the economy contracted at a 0.5% pace in the first quarter, beyond the -0.2% previously seen, due mostly to the weak consumption following Trump’s tariffs.
Apart from that, weekly unemployment data revealed that unemployment claims remain at their highest levels since the end of the pandemic, adding to the evidence of a softening labour market and increasing pressure on the Fed to lower interest rates in the coming months.
In this context, the US PCE Prices Index, due later today, is expected to show that the impact of Trump's tariffs has not filtered into consumer prices yet, which might pave the path for further Fed easing and add selling pressure on the US Dollar.
In Mexico, the central bank cur interest rates by 50 basis points, as widely expected, on Thursday and pointed to further rate cuts down the road, as consumer prices confirmed their deflationary trend, although at a slightly slower-than-expected pace.
USD/MXN is expected to depreciate further - Société Générale
The FX team at Société Générale sees the pair heading to lower levels, with upside attempts limited below 19.44: "The phase of down move is likely to extend. Next objectives are located at the August 2024 lows of 18.60/18.41 and projection at 18.15."
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.