- USD/MXN drops to seven-day lows at 19.75.
- US Dollar swings after US CPI data
- US inflation eases in August to 2.5% year-on-year versus 2.6% forecast.
- Mexico’s industrial output grows more than expected in July.
The USD/MXN started Wednesday’s session by climbing to a six-day high of 20.14, but subsequently lost ground below the 20.00 area. Following the release of Mexico’s industrial production and US inflation, the Dollar fell against the Mexican Peso to 19.75, its lowest level since September 4.
US Dollar swings sharply after US inflation data
The US Dollar Index (DXY) has reacted to the US inflation data with an initial sharp rise to 101.82, an eight-day high, although minutes later it retreated to the 101.60/101.65 area. Although headline inflation has moderated, the core CPI remains high, which has given the dollar wings, at least momentarily, as this may influence the Fed to only cut interest rates by 25 basis points (bps) at its meeting on September 18, instead of the 50 bps expected by part of the market.
He The US Consumer Price Index (CPI) has moderated by four-tenths in the year-on-year reading for Augustfalling to 2.5% from 2.9% in July, thus reaching its lowest level since February 2021. The figure exceeds consensus expectations, which estimated a reduction to 2.6%. Core inflation, however, has remained persistent at 3.2% annually, as expected.
CME Group’s FedWatch tool now puts the chances of a 25bp cut by the Fed at next Wednesday’s meeting at 83%, while it gives just a 17% chance of a 50bp cut.
Meanwhile, Mexico has published its industrial production data, which grew by 2.1% year-on-year in July after having fallen by 0.7% in June, according to the National Institute of Statistics and Geography (INEGI). The increase exceeded market expectations, as a rise of 1.1% was expected.
Traders will wait to digest the data during the American session, focusing on Thursday on US producer price inflation for August, which is expected to slow to 1.8% from 2.2% previously. At the same time, the US will release weekly jobless claims for the week of September 6.
USD/MXN Price Levels
The USD/MXN remains immersed in an uptrend on the daily chart, despite today’s setback. The pair is currently trading above 19.89, losing 1.03% on the day. If it breaks below the 19.75 support, the Dollar could slide against the Mexican Peso to 19.62, the September low recorded on September 2. Below this level, the psychological zone of 19.00 awaits.
On the upside, a further recovery above 20.00 could take the pair towards 20.15, the high for September and so far this year.
US Dollar FAQs
The United States Dollar (USD) is the official currency of the United States of America, and the de facto currency of a significant number of other countries where it is in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in daily transactions. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the dollar.
In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of the US dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing securities in new purchases. It is generally positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
