The Mexican Peso has displayed a sideways trading pattern, lingering at three-week lows, as investors hold their breath for the Bank of Mexico’s (Banxico) upcoming interest rate decision. This period of stagnation reflects broader uncertainties in the financial markets, particularly in response to the U.S. Federal Reserve’s recent monetary policy adjustments. The Fed’s “hawkish cut,” communicated during its latest meeting, has resulted in a notable increase in U.S. Dollar strength, significantly impacting currencies across the board, including the Mexican Peso.
Technical analyses reveal that the USD/MXN pair is experiencing increasing bullish momentum, with trading consistently exceeding the critical threshold of 20.30. This upward trajectory is underscored by a robust U.S. Dollar Index (DXY), which has surged to challenge two-year highs driven by the Federal Reserve’s assertive economic signals. Market observers note that unless future U.S. economic data contradicts the Fed’s strong growth forecasts, the dollar is likely to maintain its dominance, further complicating the Peso’s recovery.
Vanishingly thin margins for intervention compel Banxico to consider a rate cut of 0.25%, potentially reducing the benchmark rate to 10%. This decision, anticipated to be communicated soon, marks the fifth rate adjustment this year, with expectations for additional cuts looming in 2025. Such maneuvers at Banxico are not isolated; they are a strategic response to prevailing market conditions influenced heavily by the actions of the Fed. Financial analysts are bracing for subsequent adjustments as they analyze the impact of the Fed’s policies on not only the Peso but also Mexico’s overall economic landscape.
In its latest meeting, the Federal Reserve reduced interest rates by 25 basis points, moving the target range to 4.25%–4.50%. In a divergence from previous expectations, the Fed has revised its projection for 2025’s interest rates upward to 3.9%, indicating the likelihood of two additional cuts next year rather than the previously anticipated four. Further complicating the picture, the Fed has heightened inflation expectations to 2.5%, up from 2.1%, potentially reflecting the anticipated economic policies from the incoming U.S. administration and its inflationary impacts.
Recent economic indicators from the U.S. bolster the Fed’s tightening narrative, with growth rates revised upward. The anticipated GDP growth for this year now stands at 2.5%, alongside revised forecasts for the following years. This economic revival has underpinned a rapid increase in U.S. Treasury yields, particularly the 10-year note, which recently surged to over 4.50%. This sharp rise in yields demonstrates growing risk aversion among investors, further consolidating the U.S. Dollar’s body of strength.
Closer to home, Mexico grapples with its own economic challenges. Recent reports indicated an unexpected decline in retail sales by 0.3% in October, counter to forecasts of a modest 0.2% increase. While moderation in the yearly decrease of retail consumption signals some resilience, the figures still showcase an economy struggling to gain traction amid external pressures. Consequently, market expectations for Banxico’s rate cuts reflect these struggles, with projections of further declines to 8.5% anticipated next year.
Looking ahead, the consensus among analysts suggests the USD/MXN may appreciate further, potentially reaching the 21.00 mark by year’s end as Mexico’s economy is predicted to slow. Anticipated annual growth rates of 1.6% in 2024 and further decline to 1.2% in 2025 underscore the challenges ahead. The technical outlook remains cautiously bullish for the Peso, with current trading patterns necessitating keen attention to support levels around 20.30, which could serve as crucial barriers against shifting market sentiments.
As both the U.S. and Mexican economies navigate through a complex interplay of interest rate decisions, inflation projections, and retail performance, the future stability of the Mexican Peso remains contingent upon both domestic policy actions and external economic influences.
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