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The Mexican Peso soars in the context of a mixed US CPI, the USD falls

  • The Mexican peso recovers after two days of falls, driven by a weaker than expected US CPI.
  • The fall in the US CPI causes a cooling of inflation and increases the prospects for Fed rate cuts.
  • US Treasury yields fall, DXY falls 0.60% to 104.39, weakening the Dollar.
  • Neel Kashkari, president of the Minneapolis Fed, questions the tightening of monetary policy in the face of unexpected levels of consumer spending.

The Mexican peso erased two days of losses and rebounded against the US dollar on Wednesday, after the latter continued to weaken due to a softer-than-expected US inflation report.

Consequently, expectations of a rate cut by the Federal Reserve (Fed) increased, putting pressure on the US currency. At the time of writing, USD/MXN is trading at 16.65, falling to four-week lows.

Mexico's economic agenda remains empty and will not resume until next week. Across the border, the US Bureau of Labor Statistics (BLS) revealed that the Consumer Price Index (CPI) came in below estimates and the previous month's data. Core inflation showed signs of cooling, meaning monetary easing policy in the United States is back on the table.

US Treasury yields are collapsing on the short and long end of the curve, providing a headwind for the Dollar. The US Dollar Index (DXY) fell 0.60% to 104.39.

Meanwhile, Minneapolis Fed President Neel Kashkari echoed the news. He said Americans have been spending “more than I would have expected,” adding that the big question is “how restrictive the policy is now.”

On Tuesday, Fed Chair Jerome Powell revealed that inflation is coming down, although he added that he is not as confident as before about inflation heading toward 2%. Powell noted that tight monetary policy could take longer than expected to do its job and bring inflation back to the Fed's target.

Daily Market Movement Summary: Mexican Peso Rebounds Following US CPI Weakness and Disappointing Retail Sales

  • On Monday, the governor of the Bank of Mexico (Banxico), Victoria Rodríguez Ceja, made some moderate comments. She said the central bank could consider lowering rates as early as its next meeting on June 27. She added that, depending on the evolution of inflationary prospects, the bank could cut the main reference rate, which stands at 11.00%.
  • Mexico's economic agenda will be absent during the current week. The next economic data release is expected to be retail sales on May 20, followed by Gross Domestic Product (GDP), inflation figures and Banxico Minutes on May 23.
  • April data shows that Mexico's overall inflation is slowing. However, underlying prices are falling. This has led Banxico to revise its inflation forecasts, with the bank expected to reach its 3% target by the last quarter of 2025, later than March estimates for the second quarter of 2025. core inflation reaches 3% in the second quarter of 2025.
  • The US Department of Labor showed that the CPI rose 0.3% monthly in April, below estimates and 0.4% in March. Core CPI rose 0.3% monthly, as expected, but below the previous reading of 0.4%.
  • Other data showed that retail sales missed estimates of 0.4% and stood at 0% monthly, down from 0.6% in March. In the twelve months to April, retail sales grew 3%, down from the 3.8% rise in the previous reading.
  • Following the report, investors trimmed bets that the Fed could cut rates faster than expected, although the odds of a cut in September have recently adjusted to 97%, up from 83% on Tuesday.
  • The deterioration in consumer confidence, along with the cooling of the labor market, has opened the door for investors to consider rate cuts by the Fed. This is because policymakers at the US central bank recognized that the risks to achieving his dual mandate on employment and inflation “moved toward a better balance over the past year.”

Technical Analysis: Mexican Peso Strikes Back and USD/MXN Plunges Below 16.70

Following worse-than-expected US data, USD/MXN extended its losses beyond the 16.70 figure. The momentum indicator is on the side of the Mexican currency, as the pair has fallen to new four-week lows, about to test the next support level seen at the 2023 low of 16.62, followed by the current low of the year to date 16.25.

On the opposite side, buyers must reclaim the 50-day SMA at 16.78, which could exacerbate a rally towards the 100-day SMA at 16.92. Once surpassed, the next supply zone would be the psychological level of 17.00. In that case, the next stop would be the 200-day SMA at 17.17.

Inflation FAQ

Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a monthly and annual 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%.

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 monthly and 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.

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 typically raises interest rates to combat higher inflation, attracting more inflows of global capital from investors looking for a lucrative place to park their money.

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

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