Mexican Peso slumps as Fed holds rates, as Powell’s disregard March rate cut

• Mexican Peso falls over 0.20% against the US Dollar, in response to the Fed's decision to hold rates and a cautious tone from Chair Powell.
• Powell's balanced approach and dismissal of a March rate cut weakens the Peso against the USD.
• The Fed's commitment to reducing its balance sheet as planned and a meeting-by-meeting approach to rate decisions
• Fed's unanimous decision to maintain interest rates and cautious approach to future rate cuts heightens market risk aversion.
• US employment data and a low Employment Cost Index shows the labor market is cooling.

The Mexican Peso (MXN) edges lower against the US Dollar (USD) on Wednesday and posted losses of more than 0.20% as risk aversion drove the financial markets after the US Federal Reserve (Fed) decided to hold rates, but stroke a hawkish stance. In addition, Fed Chair Jerome Powell was balanced and poured cold water on market participants expecting a March rate cut. Therefore, the USD/MXN trades at 17.20 after hitting a daily low of 17.09.

The Fed Chair Jerome Powell remarked that policy may have peaked while stating that policy could be eased this year. He added the Fed would take a meeting-by-meeting approach and would depend on how the economy evolves. Powell noted the current uncertainty surrounding the economic outlook and emphasized that decisions regarding monetary policy would be made on a case-by-case basis in each meeting.

He also pointed out that rate cuts were not a topic of discussion in their recent meeting, signaling that the Federal Reserve is not yet ready to consider itself victorious in its efforts against inflation. Furthermore, Powell recently conveyed his belief that a rate cut in March is not likely to be on the agenda.

Daily digest market movers: Mexican Peso slides after Fed’s meeting

• On Wednesday, the Federal Reserve decided to keep rates unchanged as widely expected and adopted a neutral stance. Officials had opened the door to cut interest rates, though they need some reassurance that inflation is “sustainably” getting towards its 2% goal. In regards to the balance sheet, its reduction would continue as outlined on May of 2023.
• The Employment Cost Index (ECI), a key indicator of wage inflation monitored by Federal Reserve officials, fell from 1.1%QoQ to 0.9% in the fourth quarter, indicating a cooling in the labor market.
• The ADP Employment Change report for the United States showed weaker performance in January, with private hiring rising only 107K jobs, falling short of December’s 158K and the predicted 145K. The report mentioned, “Progress on inflation has brightened the economic picture despite a slowdown in hiring and pay.” As wages had improved in the last semester, “the economy looks like it’s headed toward a soft landing.”
• Mexico’s economy grew below forecasts in the last quarter of 2023. GDP expanded 0.1% QoQ, trailing Q3 1.1% growth and forecasts of 0.4%.
• Given that the Mexican economy remains solid, according to the data revealed in January, the Bank of Mexico (Banxico) could delay easing monetary policy as conditions remain hotter than expected.
• However, if Banxico’s officials remain determined to begin its easing cycle in Q1 of 2024, that could depreciate the emerging market currency due to the reduction of interest rate differentials. That could also underpin the USD/MXN pair toward the psychological 18.00 figure.
• The US labor market remains solid as the latest JOLTS report revealed vacancies exceeded estimates, which could prevent Fed officials from easing policy in the near term.
• Consumer Confidence was higher than the previous month’s data, courtesy of slower inflation, expectations for lower interest rates and “generally favorable employment conditions as companies continue to hoard labor,” said Dana Peterson, Chief Economist at The Conference Board.
• Additional factors that might depreciate the Mexican currency are geopolitical risks and risk aversion.
• Across the border, the US economy remains resilient as GDP in Q4 of last year crushed forecasts despite easing from Q3’s 4.9%. That could force Fed officials to refrain from easing policy, but the latest inflation data suggests they’re close to getting inflation to its 2% target.
• Nevertheless, mixed readings in other data suggest that risks have become more balanced. That is reflected by investors speculating that the Fed will cut rates by 139 basis points during 2024, according to the Chicago Board of Trade (CBOT) data.

Technical Analysis: Mexican Peso drops as USD/MXN aims toward 17.20

The USD/MXN trades range-bound, slightly tilted to the upside, capped by key Simple Moving Averages (SMAs), with the 50-day SMA at 17.13 and the 200-day SMA at 17.33. Although it appears closer to the 50-day SMA, market sentiment could lift the exchange rate to the 200-day SMA at 17.33, which, once cleared, could open the door for higher prices. Next resistance would be the 100-day SMA at 17.41, followed by the December 9 high at 17.56. Last of all sits the May 23 high from last year at 17.99.

On the flip side, if the USD/MXN exchange rate drops below the 50-day SMA at 17.13, that will expose the January 22 low at 17.05, followed by the 17.00 psychological level.

USD/MXN Price Action – Daily Chart