The Mexican Peso (MXN) has strengthened against the US Dollar (USD) following the release of the US Core Personal Consumption Expenditures (PCE) data on Friday. The Fed’s preferred inflation gauge showed a further easing of price pressures, reinforcing market expectations of a Fed rate cut in September and potentially two more before year-end. This weakening of the USD bolstered the MXN, which had previously been under pressure due to various factors.
Factors Contributing to MXN Recovery:
- Carry Trade Unwinding: The unwinding of the carry trade, where investors borrow in low-interest currencies to invest in higher-yielding ones, has lost momentum, allowing the Peso to regain some ground.
- Japanese Yen Weakening: The recent weakening of the Japanese Yen has made the carry trade attractive again, further supporting the MXN.
- Positive Poll Results: The improved performance of Democrat nominee Kamala Harris in recent polls has eased concerns about a potential Donald Trump victory, which was seen as negative for the Peso due to potential trade restrictions.
Challenges Ahead for MXN:
Despite the recent recovery, the Peso’s gains may be limited as investors anticipate a potential interest rate cut by the Banco de México (Banxico) in August. While mixed Mexican inflation data for July showed moderating core inflation, the unexpected rise in headline inflation is unlikely to deter Banxico from cutting rates to stimulate growth.
Technical Analysis:
USD/MXN has retested the June 28 high at 18.60 and formed a bearish Shooting Star candlestick pattern. If Friday’s close is a bearish red candlestick, it could confirm the Shooting Star pattern and suggest further downside in the short term. However, the short-term trend remains bullish, and a decisive break above 18.60 could lead to a continuation towards 19.00.