Mexican Peso appreciates as Banxico hints at more rate cuts
- Mexican Peso advances as Banco de Mexico reduces rates in line with forecasts.
- Banxico reduced the main reference rate to 10%, highlighting Q3 economic growth and inflation to reach the target in Q3 2026.
- USD/MXN set for uncertainty as Fed's hawkish cut contrasts with Banxico’s aggressive easing.
The Mexican Peso strengthened against the US Dollar on Thursday after the Banco de Mexico reduced interest rates as expected following the Federal Reserve’s (Fed) Wednesday decision. At the time of writing, USD/MXN trades near 20.32, down 0.17%.
Banxico unanimously decided to reduce the main reference rate by 25 basis points (bps) to 10.00%, as widely expected by analysts. The central bank added that the balance of risks to growth is tilted to the downside, though the economy expanded at a greater pace in Q3 2024.
Headline and core inflation decreased between November and December, with expectations for 2024 revised downwards. Those for the end of 2025 and the longer-term remained unchanged, and Banxico expects the Consumer Price Index (CPI) to converge to the bank’s 3% goal in Q3 2026.
Banxico’s Governing Board noted that imposing tariffs on US imports from Mexico added uncertainty to the projections. Nevertheless, the bank noted, "The inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.”
In the US, the economic docket revealed that the economy grew healthier, exceeding estimates and Q2’s reading, while the number of Americans filing for unemployment benefits dipped.
On Wednesday, the Fed adopted a less dovish stance despite cutting interest rates by 25 basis points (bps), though not unanimously. Fed Chair Jerome Powell hinted that the central bank had shifted slightly more attention to inflation, as seen by the dot plot, with most officials eyeing 50 basis points of easing for 2025.
This week, the Mexican economic docket is absent, while in the US, the release of the core Personal Consumption Expenditures Price Index and the University of Michigan (UoM) Consumer Sentiment poll will occur.
Daily digest market movers: Mexican Peso climbs as USD/MXN drops below 20.35
- Banxico estimates headline inflation would end 2024 at 4.6%, 2025 at 3.3%, and hit the 3% goal in Q3 2026. Core inflation is projected to end the current year at 3.6%, 2025 at 3.3%, and will hit 3% in Q2 2026.
- Banxico's December private sector survey forecasts Mexico's inflation to close 2024 at 4.37%, with core inflation easing to 3.60%, down from November’s 3.69%. Economic growth is expected at 1.60%, up from the previous 1.53%, while the USD/MXN exchange rate is projected at 20.25.
- For 2025, inflation is expected to decline to 3.80%, while core inflation is projected to rise slightly to 3.72%. GDP growth is forecast at 1.12%, lower than November’s 1.20% estimate, and the USD/MXN exchange rate is anticipated to reach 20.53.
- US Initial Jobless Claims for the week ending December 14 fell to 220K from 242K, beating expectations of 230K and signaling continued strength in the labor market.
- The US economy grew at an annual rate of 3.1% in Q3, surpassing the 2.8% forecast and slightly higher than the 3% growth in Q2.
USD/MXN technical outlook: Mexican Peso climbs as USD/MXN drops to 20.30
The USD/MXN uptrend remains in place, though it has halted as the Mexican currency appreciates. The exotic pair has failed to clear the 20.50 figure decisively, and it might be set to end the year at around the 20.00-20.50 range as liquidity begins to drain.
If sellers push the USD/MXN below the 50-day Simple Moving Average (SMA) at 20.13, the next support would be the 20.00 psychological figure. A breach of the latter will expose the 100-day SMA at 19.75, before challenging 19.50. For a bullish continuation, buyers must clear 20.20 before testing 20.50. On further strength, the next resistance would be the December 2 daily high of 20.59, followed by the year-to-date peak of 20.82 and the 21.00 mark.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.