Market Data 
- Mexican Peso drops down for second day, losing 0.24%.
- Powell’s cautious inflation remarks and potential for ongoing tight policy boost USD, aided by high April PPI.
- Contrasting Powell, Banxico’s Ceja hints at possible rate cuts, contributing to Peso’s decline ahead of June 27 meeting.
The Mexican Peso extended its losses against the US Dollar for the second straight day, following hawkish remarks by Federal Reserve (Fed) Chair Jerome Powell and dovish remarks by Bank of Mexico Governor Victoria Rodriguez Ceja. The Mexican currency is down 0.56% in the week. The USD/MXN trades at 16.84 and records gains of 0.24%.
Fed Chair Jerome Powell said he’s not expecting a “smooth road on inflation,” adding that it is moving lower and that “my confidence on that is not as high as it was before.” He expects the Gross Domestic Product (GDP) to grow by 2% or better with a strong labor market.
Powell noted that restrictive monetary policy “may” take longer than expected to do its work and bring inflation to the Fed’s 2% goal.
Earlier, the US Department of Labor revealed that the Producer Price Index (PPI) for April was higher than expected, in some measures, prompting investors to buy the Greenback. US Treasury yields edged up, while US equities trended lower before recovering at the time of writing.
On Monday, Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja said, “We could evaluate downward adjustments” to the main reference rate. She added that while general inflation has continued to rise, underlying prices have not. Therefore, depending on the evolution of the inflationary outlook, Banxico could evaluate continuing its easing cycle as soon as the next meeting on June 27. These comments came after the Mexican central bank kept the main reference rate unchanged at 11% last Thursday.
Daily digest market movers: Mexican Peso drops on Powell’s remarks
- Mexico’s economic docket will be absent during the current week. The next economic data released would be Retail Sales expected on May 20, followed by the Gross Domestic Product (GDP), inflation figures and the release of Banxico’s minutes on May 23.
- April’s data show that Mexico’s headline inflation is reaccelerating. However, core prices are falling. This spurred Banxico’s revision to its inflation projections, with the bank expected to hit its 3% target toward the last quarter of 2025, later than March’s estimates for Q2 2025. Core inflation is projected to hit 3% in Q2 2025.
- The US Bureau of Labor Statistics (BLS) revealed that the PPI rose 0.5% MoM, exceeding forecasts of a dip to 0.3%, with core PPI also expanding at the same pace as headline data, above estimates of 0.2%. Both readings were above March’s -0.1% drop in general and underlying inflation.
- After the report, investors trimmed bets that the Fed may cut rates faster than expected, though the odds for a September cut have lately adjusted to 83.6%, higher than Monday’s 79%.
- The deterioration in consumer sentiment, alongside a cooling labor market, has opened the door for investors to price in rate cuts by the Fed. This is because US central bank policymakers acknowledged that risks to achieving its dual mandate on employment and inflation “moved toward better balance over the past year.”
Technical analysis: Mexican Peso falls as USD/MXN rises above 16.80
The USD/MXN downtrend remains in play, even though buyers lifted the pair above Friday’s close, which could pave the way for a leg up. In the near term, momentum remains bearish, but the Relative Strength Index (RSI) aiming upward suggests that buyers are in charge.
At the time of writing, the USD/MXN is shy of conquering the 100-day Simple Moving Average (SMA) at 16.92. Once cleared, the next supply zone would be the 17.00 psychological level. A breach of the latter would expose the 200-day SMA at 17.17, followed by the January 23 swing high of 17.38 and the year-to-date high of 17.92.
On the other hand, a bearish continuation could resume if the USD/MXN tumbles below the 50-day SMA at 16.78, opening the door to test the 2023 low of 16.62, followed by the current year-to-date low of 16.25.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
