Mexican Peso drops as Banxico cut, US PCE data weighs on currency

• Mexican Peso extended its losses for the second straight day as USD/MXN hit a 19.74 peak.
• Banxico cuts rates to 10.50%, weakening the Peso as economic activity cools and inflation projections rise for 2024.
• US PCE inflation edged lower, but core PCE remains within the Fed's comfort range of 2%-3%.

The Mexican peso lost steam on Friday against the US Dollar after inflation data in the United States (US) edged lower and failed to underpin the Mexican currency. However, the recent Bank of Mexico -- known as Banxico -- decision to lower interest rates weakened the Peso. At the time of writing, the USD/MXN trades at 19.72, gaining 0.50%.

The Federal Reserve's favorite inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, was lower than expected in August, according to the US Bureau of Economic Analysis (BEA). The same report showed that core PCE, which excludes volatile items like food and energy, ticked up by a tenth, yet it remains within the 2% to 3% range.

Further data showed that Personal Spending and Personal Income showed signs of deceleration, while the University of Michigan Consumer Sentiment for September, in its final reading, improved.

In Mexico, Banxico decided to cut interest rates from 10.75% to 10.50% in a 4-1 vote split on Thursday, with Deputy Governor Jonathan Heath dissenting after voting to keep rates unchanged.

Officials acknowledged that economic activity is weakening, putting pressure on the labor market, which has shown signs of cooling. Banxico revised its inflation expectations upward for headline and core figures in 2024 but maintained its estimate that inflation will reach the target by the end of 2025.

Despite revising inflation, the bank stated, "[T]he nature of the shocks that have affected the non-core component and the projection that their effects on headline inflation will continue dissipating over the next quarters," adding that "although the outlook for inflation still calls for a restrictive monetary policy stance, its evolution implies that it is adequate to reduce the level of monetary restriction."

Source: Banxico's forecast

The Balance of Trade showed that Mexico's economy printed a deficit five times larger than expected, exerting pressure on the Peso.

Daily digest market movers: Mexican Peso tumbles on Banxico's decision, US inflation data

• Mexican political turmoil eases as market participants prepare for the change of president on October 1, a bank holiday in Mexico. President-Elect Claudia Sheinbaum's speech will be watched for hints about her economic plan.
• Mexico's Balance of Trade registered a deficit of $-4.86 billion in August, more than the $-0.5 billion expected by the consensus.
• August US PCE came at 2.2% YoY, down from 2.5% and a tenth lower than expected by the consensus.
• The core PCE edged modestly up, as expected, from 2.6% to 2.7% for the same period.
• The UoM Consumer Sentiment in September improved from 69.0 to 70.1. Inflation expectations for one year edged from 2.8% to 2.7%, and for a five-year period rose from 3% to 3.1%.
• Banxico is expected to lower borrowing costs by 175 bps toward the end of 2025, according to the swaps markets.
• US Dollar Index (DXY), which tracks the buck's performance against a basket of six peers, is virtually unchanged at 100.50.
• Market participants have fully priced in at least a 25 bps rate cut by the Fed. However, the odds for 50 bps of easing are 54.7%, lower than the 60% chance two days ago, according to the CME FedWatch Tool.

USD/MXN technical analysis: Mexican Peso slips as USD/MXN rises above 19.65

The USD/MXN resumed its uptrend, hitting a daily high of 19.74, following the tranche of data in Mexico and the US. The Relative Strength Index (RSI) remains bullish, hinting that momentum favors buyers.

Therefore, the USD/MXN could be headed for further gains. The first resistance would be the current week's high of 19.75. Once surpassed, the next stop would be the September 12 peak at 19.84, followed by the 20.00 mark. If those two levels are cleared, the current year-to-date (YTD) high of 20.22 will be exposed.

On the flip side, if USD/MXN struggles to break 19.75, it could pave the way for lower prices. The first support would be the 19.50 mark, followed by the September 24 swing low of 19.23, before the pair moves toward the September 18 low of 19.06. Once those levels are surpassed, the 19.00 figure emerges as the next line of defense.