Mexican Peso strengthens at start of week on weak US Dollar

• Mexican Peso continues its upward trend for the fourth consecutive day amid favorable risk sentiment.
• Banxico's recent rate cut to 10.25% reflects ongoing inflation concerns with forecasts adjusted to 4.7% end for 2024.
• Moody's adjustment of Mexico's credit outlook to negative highlights potential fiscal and economic challenges from judicial reforms.
• Traders monitor potential impact of Trump's economic policies on Fed's rate decisions.

The Mexican Peso appreciated against the US Dollar at the beginning of the week, gaining 0.39% during the North American session. A light economic docket in Mexico and the US keeps traders digesting last week's Bank of Mexico (Banxico) interest rate cut and US inflation data. The USD/MXN trades at 20.27 at the time of writing.

Last Thursday, Banxico lowered rates by 25 basis points to 10.25% as expected, even though the central bank acknowledged inflation risks are tilted to the upside. The board members also updated their forecast and expect inflation to end at 4.7% in 2024, up from 4.3% in previous forecasts.

In addition, Moody's changed Mexico's credit outlook to negative, mentioning constitutional reforms, which they claimed "risks eroding checks and balances of the country's judiciary system," which could negatively impact Mexico's economic and fiscal strength.

The Peso continued to rise for the fourth straight day due to an improvement in risk appetite. US equities climbed, while the Greenback dropped to a three-day low.

In the US, investors continued to assess US President-elect Donald Trump's inflation-prone policies, which might deter the US Federal Reserve (Fed) from lowering rates.

Despite this, traders expect the Fed to cut rates by 25 basis points, as depicted by the CME FedWatch Tool, with odds standing at 62%. Estimates the US central bank would keep the Fed funds rate unchanged lie at 38%.

Daily digest market movers: Mexican Peso advances sponsored by offered US Dollar

• Banxico's Governing Council voted unanimously to lower borrowing costs from 10.50% to 10.25%, as expected. Governors added that although inflation remains high and requires a restrictive policy, the disinflation process "implies that it's adequate to reduce the level of monetary policy restriction."
• Officials expect inflation to converge to the 3% goal by the last quarter of 2025.
• The USD/MXN remains underpinned by the fall of the Greenback. The US Dollar Index (DXY), which tracks the performance of the Greenback against six currencies, dropped 0.38% to 106.26.
• Fed officials crossed the wires on Friday. Boston Fed's Susan Collins reiterated Fed Chair Jerome Powell's words last Thursday about the central bank not needing to rush rate cuts. Collins said, "I don't see a big urgency to lower rates, but I want to preserve a healthy economy."
• Richmond's Fed Thomas Barkin said the Personal Consumption Expenditures (PCE) Price Index would remain in the high twos during the year's second half. He hopes and expects inflation numbers to come down in Q1 2025 and added there's a long way to go to determine the impact of high tariffs.
• Data from the Chicago Board of Trade, via the December fed funds rate futures contract, shows investors estimate 23 bps of Fed easing by the end of 2024.

USD/MXN technical outlook: Mexican Peso climbs as USD/MXN drops below 20.30

The USD/MXN uptrend remains intact with the Peso gaining some territory. If bears want to regain control, they must push the exchange rate below 20.00. A breach of the latter would expose the 50-day Simple Moving Average (SMA) at 19.75, followed by the psychological 19.50.

For a bullish continuation, the USD/MXN must surpass 20.50, followed by last week's high at 20.69. If surpassed, the year-to-date (YTD) high of 20.80 emerges as the next ceiling level before testing 21.00. A breach of the latter and the March 8, 2022, peak at 21.46 would emerge as the next resistance.

Oscillators like the Relative Strength Index (RSI) are bullish, suggesting a projected further upside in the USD/MXN.