Mexican Peso tumbles sharply as Powell turns hawkish, despite Banxico’s decision
- Mexican Peso collapsed more than 0.90%, as USD/MXN edged toward 17.70.
- Banxico unanimously agrees to maintain rates, aiming for a 3% inflation target by 2025, amidst concerns of persistent inflationary pressures.
- Fed Chair Powell's remarks on the potential for further rate hikes if economic growth surges signal a cautious stance on inflation, impacting currency dynamics.
Mexican Peso losses steam after the Bank of Mexico (Banxico) held rates unchanged, while the Federal Reserve (Fed) Chair Jerome Powell pushed back against recent dovish postures adopted by a slew of Fed officials. Consequently, the USD/MXN rallies, and trades volatile, at around the 17.50/17.70 range, posting gains.
In it monetary policy statement, Banxico reinforced its posture to hold rates at the current level, with the bank committed to bringing headline inflation to its 3% target, which is expected to be reached in 2025. The decision was unanimously approved, while they stressed that inflation risks are tilted to the upside.
Across the border, the Fed Chair Jerome Powell said that the Fed is not confident they have attained a sufficiently restrictive stance, adding that they (Fed) would not hesitate to raise rates if needed while stressing they would be deciding meeting by meeting. Chair Powell added that stronger economic growth could undermine the inflation progress and warrant a monetary policy response.
Meanwhile, economic data in the United States (US) showed that unemployment claims for the last week fell, indicating strength in the labor market.
Daily digest movers: Mexican Peso falls despite Banxico's keepng rates unchanged
- Mexico’s Consumer Price Index (CPI) was 4.26% YoY in October, below forecasts of 4.28%, and the previous reading of 4.45%.
- On a monthly basis, inflation rose 0.39%, above the 0.38% consensus and September’s 0.44%.
- Core inflation in Mexico stood high at 5.5% YoY as expected and below September’s data; while prices on a monthly basis ticked up from the 0.39% MoM estimated, above last month’s data and the 0.38% forecast.
- Initial Jobless Claims in the United States for the week ending November 4, rose by 217K, below estimates of 218K, and last week’s 220K.
- Federal Reserve (Fed) officials continued to strike mixed signals, as Philadelphia Fed Patrick Harker emphasized that rates need to remain higher for longer. On the contrary, Chicago’s Fed Goolsbee turned dovish as he saw risks of overshooting rates.
- Money market futures have priced in a 25 bps rate cut by the Federal Reserve in July 2024.
- Mexico´s economy remains resilient after October’s S&P Global Manufacturing PMI improved to 52.1 from 49.8, and the Gross Domestic Product (GDP) expanded by 3.3% YoY in the third quarter.
- On October 24, Mexico's National Statistics Agency, INEGI, reported annual headline inflation hit 4.27%, down from 4.45% at the end of September and below forecasts of 4.38%.
- Banxico revised its inflation projections from 3.50% to 3.87% for 2024, which remains above the central bank’s 3.00% target (plus or minus 1%). The next decision will be announced on November 9 at 19:00 GMT
Technical Analysis: Mexican Peso appreciates, though USD/MXN could aim higher as golden cross formation looms
The USD/MXN remains neutrally biased, though about to form a golden cross with the 50-day Simple Moving Average (SMA) crossing above the 200-day SMA, each at 17.67 and 17.68, respectively. That could pave the way for further upside. However, buyers need to lift the exchange rate above the 17.70 area, so they can challenge the 20-day SMA at 17.95, ahead of the psychologically 18.00 figure.
On the flip side, key support levels lie at Monday’s low of 17.40, followed by the 100-day Simple Moving Average (SMA) at 17.32. A breach of the latter will expose the 17.00 figure before the pair aims to test the year-to-date (YTD) low of 16.62.
Interest rates FAQs
What are interest rates?
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
How do interest rates impact currencies?
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
How do interest rates influence the price of Gold?
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
What is the Fed Funds rate?
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
