USD/MXN appreciates to near 18.00 as US Dollar gains ground due to a risk-off mood

USD/MXN gains ground due to risk-off sentiment despite dovish sentiment surrounding the Fed.
Vice President Kamala Harris had secured endorsements for the leading candidate for the presidential nomination.
Traders await the release of the first half-month Inflation data for July on Wednesday.

Akhtar Faruqui FXStreet

USD/MXN edges higher to near 18.00 during the European session on Tuesday. This upside could be attributed to the increased risk aversion, underpinning the US Dollar (USD). The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, trades around 104.30 after recovering its daily losses during the early European hours on Tuesday.

However, the US Dollar may limit its upside as expectations rise for a Federal Reserve (Fed) rate cut in September. Last week, Fed Chair Jerome Powell noted that the three US inflation readings this year "add somewhat to confidence" that inflation is on track to meet the Fed’s target sustainably, implying that interest rate cuts might be approaching.

In US politics, Democrats rallied behind Vice President Kamala Harris as the leading candidate for the presidential nomination. NBC News projected that Harris had secured endorsements from a majority of the Democratic party’s pledged convention delegates. The threshold for securing the nomination is 1,976 delegates, and NBC estimates that Harris has received the support of 1,992 delegates, either through spoken or written endorsements.

Traders will likely observe the data releases of the Global Purchasing Managers Index (PMI) and Gross Domestic Product (GDP) later this week. These figures may offer fresh insights into the economic conditions of the United States (US). On the Swiss front, the first half-month Inflation and Core Inflation data for July are scheduled to be released on Wednesday.

On Monday, Mexico’s economic activity expanded by 1.6% year-over-year in May, slowing from the nearly two-year-high increase of 5.4% in the previous month but surpassing market expectations of a 1.4% increase. Additionally, Retail Sales in Mexico grew by 0.3% year-over-year in May, a significant slowdown from the 3.2% increase in the previous month. On a monthly basis, sales grew by 0.1%, down from the prior increase of 0.5%.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

How do decisions of the Banxico impact the Mexican Peso?

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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.

How does economic data influence the value of the Mexican Peso?

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

How does broader risk sentiment impact the Mexican Peso?

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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