Mexican Peso hovers around 20.00 as the US Dollar pulls back

• The Mexican peso draws some support from the softer US Dollar to return to the key 20.00 level.
• Investors are trimming US Dollar bets ahead of Wednesday's Federal Reserve meeting.
• The USD/MXN is trading lower but might need an extra boost to breach the 20.00 level.

The Mexican Peso (MXN) opens the week with moderate gains and consolidates near the 20.00 threshold. Amid the US Dollar's (USD) reversal, declining US Treasury yields are providing some support to the Mexican currency ahead of interest rate decisions of both central banks.

In today's economic calendar, US preliminary Purchasing Managers Index (PMI) data is expected to show that manufacturing activity contracted further in December, with the services sector expanding at a slower pace than in the previous month. The NY Empire State Manufacturing Index is expected to confirm the soft momentum of the sector.

These figures would be consistent with the view of a Federal Reserve (Fed) rate cut on Wednesday, although the market is likely to wait for some more insight into the central bank's forward guidance before making investment decisions.

In Mexico, data was disappointing last week, with consumer inflation dropping beyond expectations and consumer confidence and industrial output disappointing. The macroeconomic backdrop remains resilient, with unemployment at low levels, but concerns that higher tariffs by Trump's administration next year will hurt growth and will likely pressure the Bank of Mexico (Banxico) to cut rates by 25 bps on Thursday.

Daily digest market movers: US Dollar rally falters as the Fed decision approaches

• The US Dollar Index (DXY) has stalled near three-week highs and is trimming some gains on Monday as investors take profits awaiting the Fed's monetary policy decision, due on Wednesday.
   
• US Treasury yields have pulled back from last week's highs, undermining support for the USD. The yield of the benchmark 10-year note has retreated from 4.40% after having rallied continuously for the previous five trading days.
   
• US economic data released last week were mixed. Consumer inflation remained steady above the Fed's 2% target rate, producer prices accelerated, but jobless claims increased against market expectations.
   
• The CME Fed Watch tool shows that the market is nearly fully pricing a 25 basis point (bps) rate cut by the Fed after Wednesday's meeting. For next year, however, the market is pricing a 60% chance that the central bank will cut rates once or twice.
   
• Later today, the NY Empire State Manufacturing Index is expected to show a moderate deterioration in the manufacturing conditions, to a 12 leading from 31.2 in November.
   
• A few hours later, the preliminary US S&P Global Manufacturing PMI is expected to show a moderate decline to 49.4 in December from 49.7 last month. Services activity is seen slowing down to 55.7 from 56.1.

Mexican Peso technical outlook: USD/MXN has  strong support at the 20.00 area

The USD/MXN is trading lower from its late November highs near 21.00, but the 20.00 psychological level remains a strong support for the pair. The pair has been treading water between the mentioned 20.00 support and 20.30 on the upside during last week.

The Mexican Peso would need an additional impulse to breach the 20.00 level against the US Dollar  and shift its focus toward the October 24 and 25 and November 7 lows, at 19.75

On the upside, the USD needs to confirm above 20.30 before aiming for the December 2 high at 20.60 and November's peak at around 20.80.

 

USD/MXN 4-Hour Chart