Most recent article: Mexican Peso falls against US Dollar on solid US economic data ahead of Banxico decision

  • Mexican Peso stages a comeback after the US Federal Reserve’s decision to hold rates.
  • The Federal Reserve hinted it ended its tightening cycle and opened the door to three rate cuts.
  • USD/MXN plunged sharply from around daily highs toward the 17.20 area.

Mexican Peso (MXN) rallied sharply against the US Dollar (USD) as the Federal Reserve telegraphed they finished its tightening cycle, though “some” uncertainty surrounds Chair Jerome Powell’s press conference. At the time of writing, the USD/MXN is trading at 17.25, losing 0.26% on the day.

The Federal Reserve decided to keep rates unchanged at around 5.25% 5-50%, acknowledging that growth and the labor market are easing while stating that although inflation is lower, remains elevated. Nevertheless, the Fed surprised the markets as they see monetary policy as sufficiently restrictive, as revealed by the Summary of Economic Projections (SEP), while opening the door for three rate cuts for the next year.

Mexico’s economic docket remains scarce, yet on Thursday, the Bank of Mexico (Banxico) will announce its verdict on monetary policy and is expected to keep rates unchanged. The latest Mexican economic indicators show the economy remains resilient, with inflation above the central bank’s target. In addition, PMIs remained at expansionary territory, and Industrial Production smashed estimates, portraying an optimistic economic outlook for the country.

Daily digest movers: Mexican Peso benefits as the Fed expect three rate cuts in 2024

  • In the monetary policy statement, Fed officials stated the held monetary policy unchanged at the 5.25% - 5.50% range for the third consecutive meeting.
  • The US central banks stated they would remain data-dependent to set monetary policy in the upcoming year and continue to reduce their balance sheet as previously described. In contrast, they said their commitment to bring inflation towards its 2% goal.
  • The Summary of Economic Projections (SEP) confirmed the Fed had finished its tightening cycle, as most officials estimate the federal funds rate (FFR) to be at 5.4% for the rest of 2023.
  • For 2024, the US central bank projects they would cut rates by 72 basis points, from the FFR effective rate of 5.33% to 4.61%.
  • In other projections, growth is foreseen to rise to 2.6% from September 2.1%, while headline inflation is expected to dip below 3% from 3.3% and core to slid towards 3.2% from 3.7%, with both readings projected to reduce compared to September.
  • In September, the SEP showed that most Fed officials estimate the federal funds rate (FFR) to be at around 5.6% by the end of 2023. If policymakers keep the projections unchanged, that could be perceived as hawkish, and the USD/MXN could aim higher.
  • Fed Chair Powell is expected to push back against speculations of looser monetary policy. Instead, he would stick to its previous stance of “we are prepared to tighten policy further if it becomes appropriate to do so.”
  • The US Producer Price Index (PPI) inflation for November dipped in annual and monthly readings, in contrast to consumer inflation, which delivered mixed readings. The core Consumer Price Index (CPI) stands stubbornly at around 4%.
  • Money market futures estimate the Fed will slash rates by 130 basis points toward the end of next year.
  • A Reuters poll showed that 23 of 25 analysts expect the Bank of Mexico would keep rates at 11.25% unchanged, while one estimates a rate cut to 11%. Annual inflation ticked up to 4.32% in November, though it didn’t dent policymakers' intentions to ease policy next year if data confirms the disinflation process.

Technical analysis: Mexican Peso climbs as the USD/MXN tumbles and extends losses below the 100-day SMA

The USD/MXN is neutral to upward biased despite sitting below key technical levels, like the 100, 200, and 50-day Simple Moving Averages (SMAs). Given the fundamental backdrop, if the Fed struck a hawkish message, the pair could rally and break each of the previously mentioned levels at 17.40, 17.54, and 17.64, respectively. Once cleared, the next resistance level would be the psychological 18.00 figure.

On the other hand, failure to reclaim the 100-day SMA could see sellers drag prices toward the 17.20 area, ahead of a strong demand region at around the 17.00/05 range. Once hurdled, the USD/MXN could 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.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

EUR/USD declines toward 1.0850 after US data

EUR/USD declines toward 1.0850 after US data

EUR/USD extends its downward correction toward 1.0850 in the American session. The US Department of Labor reported that there were 222,000 first-time application for unemployment benefits last week, helping the USD hold its ground and causing the pair to stretch lower.

EUR/USD News

GBP/USD corrects to 1.2650 area on modest USD recovery

GBP/USD corrects to 1.2650 area on modest USD recovery

After touching its highest level in over a month at 1.2700, GBP/USD reversed its direction and declined toward 1.2650 on Thursday. The modest USD rebound seen following Wednesday's sharp decline makes it difficult for the pair to regain its traction.

GBP/USD News

Gold aims to retest the $2,400 area

Gold aims to retest the $2,400 area

Gold advanced toward $2,400 on Wednesday as US Treasury bond yields pushed lower following the April inflation data. The recovery in US yields combined with the US Dollar's resilience after Jobless Claims data, however, causes XAU/USD to retreat toward $2,370 on Thursday.

Gold News

Is the crypto bull run back? Premium

Is the crypto bull run back?

Bitcoin’s ascent to $65,000 seems to have breathed hope into the choppy crypto markets. Some altcoins have shot up 10% to 20% due to BTC’s comeback. Investors wonder if this is the resumption of the crypto bull run.

Read more

BRICS, the West and the rest – global trade hubs and de-dollarization

BRICS, the West and the rest – global trade hubs and de-dollarization

World trade is fragmenting into opposing blocks, warns the IMF. The BRICS and their allies are distancing themselves from the West. BRICS are attempting to de-dollarize and replace SWIFT to circumvent the threat of sanctions.

Read more

Forex MAJORS

Cryptocurrencies

Signatures