- The exchange rate of the Mexican Peso against the US Dollar registers gains of 1.48% while the USD/MXN bulls recover the 18.00 level.
- Geopolitical tensions are intensifying with the evolution of the conflict between Israel and Hamas and the possible involvement of Iran.
- Mejía, deputy governor of Banxico: Inflation would reach the central bank’s objective in 2025, with the current orientation of monetary policy.
He Mexican peso (MXN) witnessed an increase in selling pressure in the mid-North American session, particularly against the US Dollar (USD), as market sentiment deteriorated, triggered by threats of an escalation in the conflict between Israel and Hamas. . Consequently, United States (US) Treasury bond yields rose, lifting yesterday’s battered US dollar. The USD/MXN pair is trading at 18.26 after bouncing from daily lows of 17.96.
US President Joe Biden’s visit to Israel sparked an escalation of the conflict after claiming that Israel was not responsible for the explosion that rocked a Gaza hospital, contrary to Palestinian claims. His decision to back Israel’s version of events reignited tensions across the region, with Iran threatening to enter the conflict. The resulting risk aversion boosted the dollar to the detriment of the Mexican peso.
The deputy governor of the Bank of Mexico (Banxico), Omar Mejía, commented in a podcast that the balance of inflation risks has not worsened, Reuters reported. The Banxico official added that the current restrictive monetary policy is managing to curb inflation to its goal and that this would reach Banxico’s objective for the second quarter of 2025.
Highlighting the US economic agenda were Construction Permits, which plummeted -4.4% compared to last month’s data, while Housing Starts improved to 7%, from -12.5% in August.
Daily summary of market movements: The Mexican peso oscillates according to market sentiment; USD/MXN pair hits 7-day high
- US retail sales in September grew 0.7% month-on-month, above forecasts of 0.3%, but below August’s upward revision of 0.8%.
- Industrial Production increased 0.3% month-on-month, above forecasts and 0.0% the previous month.
- Mexico’s GDP in 2023 is expected to reach 3.2%, according to the World Bank and the International Monetary Fund.
- The New York Fed’s Empire State Manufacturing Index for October fell to -4.6, above forecasts of -7, but worse than September’s 1.9 expansion.
- Philadelphia Fed President Patrick Harker commented that the current level of rates was keeping homebuyers on the sidelines, noting that the Fed is likely done raising rates.
- According to the Financial Times, Chicago Fed President Austan Goolsbee stated that the drop in inflation in the US is not a blip.
- One-year US inflation expectations rose from 3.2% to 3.8%, while five-year inflation expectations rose to 3% from 2.8%.
- Mexico’s industrial production (IP) in August improved 5.2% year-on-year, exceeding forecasts of 4.6% and July’s 4.8% increase.
- On a monthly basis, industrial production in Mexico rose 0.3%, as expected, but below the previous reading of 0.5%.
- The US Consumer Price Index rose 3.7% year-over-year in September, unchanged from August but above forecasts of 3.6%.
- The US core CPI fell to 4.1%, as expected, from 4.3% in August.
- Mexico’s Consumer Price Index (CPI) grew 4.45% year-on-year in September, slightly below the estimated 4.47%.
- Core CPI inflation in Mexico stood at 5.76% year-on-year, as estimated, but has broken the 6% threshold.
- The Bank of Mexico (Banxico) kept rates at 11.25% in September and revised its inflation forecasts from 3.5% to 3.87% for 2024, above the central bank’s target of 3% (plus or minus 1%).
Technical Analysis: Mexican Peso prospects deteriorate as USD/MXN buyers target 18.50
The Mexican Peso continues to weaken against the US Dollar after USD/MXN broke the 18.10 resistance, rallying to a new weekly high of 18.30 before retreating slightly to current prices. Therefore, the trend of the exotic pair remains bullish, and it could test the October 6 high of 18.48 before rising towards 19.00. On the other hand, if USD/MXN falls below 18.10, traders could expect a test of the psychological figure of 18.00.
Inflation FAQ
What is Inflation?
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
What is the impact of inflation on currency exchange?
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.
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.
