Mexican Peso soars against US Dollar as US business activity slows down

• Mexican Peso capitalized on weaker-than-expected US economic output, uptick in risk appetite.
• Upcoming mid-month inflation data in Mexico could impact Banxico's rate decisions, with expectations leaning toward easing policy.
• The Citibanamex poll shows analysts expect Banxico to hold rates unchanged in May but could resume its easing cycle in June.

The Mexican Peso stages a comeback and rallies against the US Dollar in early trading during Tuesday's North American session. Weaker-than-expected economic data from the United States (US) and an improvement in risk appetite kept the Greenback pressured as geopolitical woes temper. The USD/MXN trades at 16.99, clocks losses of 0.81%.

Mexico's economic docket revealed on Monday that economic activity in February 2024 improved, though it failed to boost the Peso. Traders are expecting the release of mid-month inflation figures for April, with core inflation expected to dip further, while the headline Consumer Price Index (CPI) is foreseen remaining unchanged. If the disinflation process shows signs of evolving, that could influence the Bank of Mexico (Banxico) to continue to cut rates, which remain elevated at 11.00%.

The Citibanamex Poll released on Monday suggests that most analysts expect Banxico to keep rates unchanged at the May monetary policy meeting. The consensus expects a rate cut for the June meeting, while the median estimate calls for the main reference rate to end at 10.00%, up from 9.63% previously.

Across the border, S&P Global revealed that business activity in the US edged lower, an indication that the economy is slowing down amid higher interest rates set by the Federal Reserve.

Daily digest market movers: Mexican Peso rescued by softer US S&P PMIs

• Banxico's Governor Victoria Rodriguez Ceja said that service inflation is not slowing as expected. She added that the Peso's strength has helped to temper inflationary pressures and lower imported goods. She emphasized that Banxico would remain data-dependent.
• Mexico's March inflation figures showed that the CPI was 4.48% and 4.69% for core YoY. On a monthly basis, the CPI was 0.27% and 0.33%, respectively.
• On Monday, the National Statistics Agency (INEGI) revealed that Economic Activity rose 1.4% MoM and 4.4% YoY in the second month of the year compared to January's 0.9% and 1.9% increases, respectively.
• Last week, the International Monetary Fund (IMF) updated its economic growth projections for Mexico, reducing the 2024 growth forecast from 2.7% to 2.4% and the 2025 forecast from 1.5% to 1.4%.
• S&P Global revealed that the US Manufacturing PMI was 49.9, below the estimates of 52, while the Services index stood at 50.9, down from the 52 expected. Therefore, the Composite PMI was down from 52.1 to 50.9.
• Market participants had priced out an interest rate cut by the Fed in June and July, sparked by hawkish comments expressed by Fed officials last week.
• Data from the Chicago Board of Trade (CBOT) suggests that traders expect fed funds rate to finish 2024 at 4.965%, down from 4.985% on Monday.

Technical analysis: Mexican Peso counterattacks as USD/MXN tumbles below 200-day SMA

The Mexican Peso regained its previous strength as shown by the USD/MXN edging below the 200-day Simple Moving Average (SMA) at 17.16, opening the door to challenge the 17.00 figure. If sellers push the exchange rate below the latter, they could test the 100-day SMA at 16.96. A breach of the latter will expose the 50-day SMA at 16.81.

On the other hand, buyers need to conquer the 200-day SMA at 17.16. Once surpassed, the next resistance level would be the January 23 high at 17.38, followed by December 5's 17.56 and the 18.00 figure.

USD/MXN Price  Action - Daily Chart