- The Mexican Peso surged over 0.80% against the US Dollar after the Federal Reserve opted to maintain interest rates and announced plans to taper its balance sheet reduction starting in June.
- Fed Chair Jerome Powell emphasized a cautious stance, indicating that future monetary policy adjustments would hinge on data and uncertainties regarding inflation hitting the 2% mark.
- Notably, the dovish pivot involves scaling back the monthly reduction of Treasury holdings from $60 billion to $25 billion.
The Mexican Peso surged against the US Dollar on Wednesday following the Federal Reserve’s decision to maintain interest rates while hinting at a potential reduction in its Quantitative Tightening program starting in June. As of the latest update, the USD/MXN pair trades at 16.98, marking a decline of over 0.80%.
During the press conference, Fed Chair Jerome Powell emphasized that any rate cuts would be contingent on inflation demonstrating a clear trajectory towards the 2% target, citing a lack of confidence in the current inflation data. Powell reiterated the Fed’s commitment to evaluating monetary policy on a meeting-by-meeting basis and assured a gradual adjustment to the balance sheet reduction to ensure stability in money markets.
Powell dismissed the notion of raising rates when questioned, reaffirming the Fed’s belief that current monetary policy is sufficiently restrictive to manage inflation.
In its earlier announcement, the Federal Reserve opted to maintain the federal funds rate at 5.25%-5.50%. While acknowledging improved balance in risks related to the dual mandate of employment and inflation, recent data indicated a stall in inflation progress.
Fed policymakers disclosed plans to decrease holdings of US Treasury securities on its balance sheet from $60 billion to $25 billion starting in June.
Meanwhile, Mexico’s economic growth showed signs of slowdown according to the Instituto Nacional de Estadistica Geografia e Informatica (INEGI). The Gross Domestic Product (GDP) for Q1 2024 expanded by 1.6% year-on-year, falling short of estimates at 2.1% and trailing the previous quarter’s 2.5% growth. However, on a quarterly basis, there was a slight improvement from 0.1% to 0.2%, surpassing expectations for stagnant growth.
Daily digest market movers: Mexican Peso appreciates on mixed US data
- In April, Mexico’s inflation data presented a mixed picture. Headline inflation saw an increase, largely attributed to a surge in oil prices. However, underlying prices experienced a decline, validating the Bank of Mexico’s (Banxico) decision to reduce rates.
- While most analysts anticipate Banxico maintaining rates at 11.00%, new data might spark intense debates among Banxico’s Governing Council members on May 9. Banxico Governor Victoria Rodriguez Ceja emphasized the central bank’s reliance on data, suggesting that weak GDP figures could prompt a “live meeting” on May 9.
- According to the Citibanamex Survey, the majority of analysts anticipate Banxico to hold rates steady at the May meeting. The median forecast suggests a rate cut in June, with expectations for the main reference rate to reach 10.00% by year-end, up from the previous estimate of 9.63%.
- In the US, measures of business activity showed a mixed performance. The S&P Global Manufacturing PMI came in at 50.0, surpassing expectations but trailing March’s figure of 51.9. Conversely, the ISM Manufacturing PMI fell short at 49.2, indicating sector contraction following March’s expansion of 50.3.
- April’s ADP Employment Change rose to 192K, exceeding estimates but below March’s upwardly revised figure of 208K. Additionally, job openings, as indicated by the JOLTS report, declined in March to their lowest level, dropping from 8.813 million to 8.488 million.
- The Federal Reserve is expected to maintain rates at the May 1 meeting, although traders will closely watch Fed Chair Jerome Powell’s press conference. A hawkish stance could lead to a rally in favor of the Greenback; otherwise, the USD/MXN pair might resume its downward trajectory.
- Data from the Chicago Board of Trade (CBOT) indicates that traders anticipate the fed funds rate to conclude 2024 at 5.100%, up from the previous estimate of 5.080% as of Tuesday.
USD/MXN technical analysis: Mexican Peso regains control, USD/MXN dives below 200-day SMA
The Mexican Peso recovered some of its losses from Tuesday, with the USD/MXN struggling to breach the 200-day Simple Moving Average (SMA) at 17.17. Instead, it turned downwards, edging closer to the 17.00 mark. Should sellers drive the price below this level, immediate support is anticipated at the 100-day SMA at 16.94, followed by the 50-day SMA at 16.81, before potentially reaching last year’s low of 16.62.
On the other hand, if buyers manage to reclaim the 200-day SMA, it could open the path to test the weekly high of 17.24. Further upward movement might lead to challenging the January 23 swing high of 17.38 and the year-to-date (YTD) high of 17.92, with a potential target at 18.00.
