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- The Mexican peso rebounds to 18.24 against the US dollar after Banxico’s decision to keep its interest rate at 11.00%.
- The decision is in line with recent inflation data, and aims to reach an inflation rate of 3% by the fourth quarter of 2025.
- Inflation risks are heightened by the services sector, cost pressures, the falling peso and geopolitical tensions.
The Mexican peso regained some ground against the US dollar and rose more than 1% on Friday after the Bank of Mexico decided to keep interest rates unchanged due to “special factors” and the peso’s depreciation following the results of the June 2 general election. Although the USD/MXN pair is trading down 0.73% at 18.30 on the day, it ends the week and month with gains of 1.19% and 7.72%, respectively.
The Bank of Mexico left a lifeline to the damaged peso on Thursday, as it held… Rates UK inflation rate reached 11.00% after inflation accelerated again, according to mid-June inflation data.
The Mexican institution expects headline inflation to approach the bank’s 3% target by the fourth quarter of 2025, and acknowledged that inflation risks are tilted to the upside due to higher services inflation, cost pressures, the devaluation of the Mexican peso and geopolitical conflicts.
On the other side of the border, the US Federal Reserve’s preferred measure of inflation came in as consensus had expected, showing an improvement in the headline and core personal consumer spending index.
The data failed to support the US dollar, which remains under pressure, losing about 0.16% as revealed by US dollar index (DXY). Hence, USD/MXN may continue to decline towards the rest of the day with sellers targeting the April 19 high at 18.15.
Daily Market Movers Summary: Mexican Peso Rises After Banxico Holds
- Banxico’s decision was not unanimous and was seen as cautious as Deputy Governor Omar Mejia Castellazo opted to cut the interest rate by a quarter of a percentage point.
- The Mexican central bank’s monetary policy statement highlighted that the Governing Council expects the disinflationary process to evolve and added that “looking ahead, the Council expects that the inflationary environment may allow for discussion of reference rate adjustments.”
- A Citibanamex survey showed economists are unlikely to cut interest rates by the central bank. They also revised down 2024 GDP growth from 2.2% to 2.1% year-on-year and expect the USD/MXN exchange rate to end the year at 18.70, up from 18.00 previously reported.
- US personal consumption expenditures were less than 0.3% in April and were 0% from the previous month as expected. Core personal consumption expenditures expanded 0.1% from the previous month as expected, also less than the previous reading of 0.3%.
- The final US Consumer Confidence reading for June of 68.2 deteriorated from May’s reading of 69.1, but improved as the preliminary reading reached 65.8. Inflation expectations over both short and long periods remained constant at 3%.
- The CME FedWatch tool shows the odds of a 25 basis point Fed rate cut at 59.5%, unchanged from the previous day.
Technical Analysis: Mexican Peso Rises as USD/MXN Drops Below 18.30
The USD/MXN pair is going through a period of decline after hitting a daily high of 18.59 earlier in the day, opening the door to challenging key support levels. From a momentum perspective, sellers are gaining some momentum. This is evidenced by the Relative Strength Index (RSI) pointing lower although still bullish, indicating that the pullback may be short-lived.
For the downside to continue, sellers need to reclaim the April 19 high which has turned into support at 18.15, which would pave the way towards 18.00. Next support will be the 50-day SMA at 17.37 before testing the 200-day SMA at 17.23.
On the other hand, if buyers manage to make a decisive break above the psychological level of 18.50, the next stop will be the year-to-date (YTD) high at 18.99, followed by the March 20, 2023 high at 19.23.
Frequently Asked Questions About Inflation
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly and yearly basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level for central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index measures the change in the prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a monthly and annual basis. The core CPI is the number that central banks target because it excludes volatile food and fuel inputs. When the core CPI rises above 2%, it usually leads to higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation falls.
Although it may seem counterintuitive, high inflation in a country causes the value of its currency to rise and vice versa for lower inflation. This is because the central bank will typically raise interest rates to combat rising inflation, which attracts more global capital flows from investors looking for a profitable place to park their money.
Gold has historically been the go-to asset for investors during times of high inflation because it maintains its value. While investors often buy gold as a safe haven during times of extreme market turmoil, this is not the case most of the time. This is because central banks raise interest rates when inflation is high to combat it. Higher interest rates are negative for gold because they increase the opportunity cost of holding gold versus interest-bearing assets or putting money in a cash deposit account. Conversely, lower inflation tends to be positive for gold because it lowers interest rates, making the shiny metal a more viable investment alternative.
