Mexican Peso counterattacks as the Federal Reserve shifted dovish

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.