The Mexican Peso has depreciated and reversed its weekly gains due to mixed US economic reports. The US Producer Price Index reaching its highest level since June has fueled discussions on inflation trends. Meanwhile, the market still expects the Federal Reserve to cut interest rates by 25 basis points next week.
US Economic Data and Its Influence on the Peso
Details of Key Figures Affecting Currency Movement
The Mexican Peso weakened after having two consecutive bullish days, dropping over 0.44% against the US Dollar as mixed US economic data and a holiday in Mexico led to thin trading conditions. The USD/MXN is now trading at 20.20 after bouncing off weekly lows of around 20.09.
US factory gate inflation increased in November, with the Producer Price Index (PPI) rising to its highest level since June. At the same time, the number of Americans filing for unemployment benefits also went up.
Market Expectations for Fed and Banxico Rate Cuts
What Traders Anticipate Regarding Interest Rates
Even with inflation reaccelerating, market players are confident that the Federal Reserve will cut interest rates at next week’s meeting. Odds of a 25 basis points rate cut by the Fed, according to the fed fund rate futures market, are now at 99%.
In Mexico, the economic docket showed that Industrial Production plunged in October in both monthly and annual figures. Banxico is expected to continue its easing cycle following Monday’s inflation report, as November’s Consumer Price Index (CPI) indicates that prices are dropping faster than expected. Analysts at JP Morgan think Banxico might lower rates by 50 basis points.
Key Economic Data Highlights for the Week
Summary of Notable Figures from Both Countries
November’s PPI in the US showed headline inflation rising to 3% year-on-year, up from 2.4% in October and above the expected 2.6%. Core PPI also climbed to 3.4% year-on-year, surpassing forecasts of 3.2% and October’s 3.1%. US Initial Jobless Claims for the week ending December 7 spiked to a two-month high of 242,000, well above the projected 220,000.
Mexico’s Industrial Production contracted by -1.2% month-on-month in October, down from a 0.6% expansion in September and well below estimates of -0.2%. On an annual basis, production dropped -2.2% year-on-year from -0.3%, missing forecasts of -0.6%.
The swaps market suggests Banxico will cut interest rates by 25 basis points at the December 19 meeting. The US yield curve for 2025 implies speculators estimate 100 basis points of easing toward the end of the year, and data shows investors estimate 24 basis points of Fed easing by the end of 2024.
Technical Outlook for the USD/MXN Pair
Resistance and Support Levels for the Currency Pair
The USD/MXN bounced off weekly lows as the pair had consolidated below the 20.10 area for the last four days. However, demand for the US Dollar weighed on the Peso and lifted the pair back to the 20.20 mark.
Momentum remains tilted to the downside as shown by the Relative Strength Index (RSI). For lower exchange rates to occur, sellers must push the USD/MXN below 20.00. In that case, the next support would be the 100-day Simple Moving Average (SMA) at 19.68, followed by 19.50. With further weakness, the pair could test the October 4 swing low of 19.10 and then 19.00.
Conversely, if buyers keep USD/MXN above 20.20, the next resistance would be 20.50. A breach of this level will expose the December 2 daily high of 20.59, followed by the year-to-date (YTD) peak of 20.82, and then the 21.00 mark.
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