USD/MXN extends downside to near 18.50 amid expectation of Fed rate cut

USD/MXN extends the decline around 18.60 in Friday’s early Asian session.
The expectation of a Fed rate cut in September supports the Mexican Peso.
The Mexican Peso remains strong despite a surprise rate cut by Banxico last week.

Lallalit Srijandorn FXStreet

USD/MXN trades in negative territory for the fourth consecutive day around 18.60 during the early European trading hours on Friday. The further downside of the pair is backed by the expectation that the US Federal Reserve (Fed) would cut at least a 25 basis point (bps) in September. Investors will monitor the preliminary US Michigan Consumer Sentiment Index for August, Building Permits, and Housing Starts, which are due later on Friday. Also, the Fed's Austan Goolsbee is set to speak.

The upbeat US economic data on Thursday, including Initial Jobless Claims and Retail Sales, eased fears about a potential recession in the United States. However, traders are still expecting the Fed to cut its interest rate in September, which weighs on the Greenback in the near term. The market is now fully priced for a 25 basis points (bps) Fed rate cut in September and nearly 20% priced for a 50 bps cut, according to the CME FedWatch tool.

The upside of the Mexican Peso occurred despite a surprise rate cut by Mexico’s central bank (Banxico) last week, lowering interest rates by 25 bps from 11% to 10.75%. Mexican economist Alexis Milo, former chief economist at HSBC México, noted, “The markets in the US are having their best day in more than a year, and that is allowing the peso to recover. This effect prevailed over the depreciation that we would have expected with a rate cut. ”

Banxico FAQs

What is the Bank of Mexico?

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

How does the Bank of Mexico’s monetary policy influence the Mexican Peso?

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the 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. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

How often does the Bank of Mexico meet during the year?

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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