Overview
The Mexican peso depreciated against the US dollar during mid-week trading, as Jerome Powell’s cautious remarks on inflation and employment bolstered the greenback. Additionally, market speculation that the Bank of Mexico (Banxico) will continue cutting its benchmark interest rate further weakened the peso.
Dollar Strengthens
Jerome Powell, the Federal Reserve (Fed) Chair, expressed cautiousness about balancing attention to high inflation and weakening employment during his recent comments. This has strengthened the dollar, although traders still anticipate further adjustments from the Fed.
- FedWatch Tool: According to the FedWatch tool from CME Group, traders predict a 92% probability of another rate cut by the Fed in October and at least one more reduction before year-end.
- PCE Index: Traders are eagerly awaiting the release of the Personal Consumption Expenditure (PCE) price index data in the US on Friday, which is the Fed’s preferred inflation gauge. This data will provide insights into future interest rate decisions.
Banxico Rate Cut Bets
Locally, the market reacted to the first-quarter inflation report showing that Mexico’s general price index for consumers accelerated to 3.74%, although this figure was below expectations. The underlying index rose to 4.26%.
Last month, Banxico moderated the magnitude of interest rate adjustments by reducing the benchmark rate by 25 basis points. The central bank’s latest statement suggests further reductions are on the horizon, with another cut anticipated in tomorrow’s decision.
Key Questions and Answers
- What caused the peso’s depreciation? The peso weakened due to Jerome Powell’s cautious remarks on inflation and employment, which strengthened the US dollar. Additionally, market speculation that Banxico will continue cutting its benchmark interest rate further weakened the peso.
- What are traders expecting from the Fed? Traders predict another rate cut by the Federal Reserve in October with 92% probability and at least one more reduction before year-end, according to the FedWatch tool from CME Group. They are also eagerly awaiting the Personal Consumption Expenditure (PCE) price index data in the US on Friday for insights into future interest rate decisions.
- What is the current state of inflation in Mexico? The first-quarter inflation report showed that Mexico’s general price index for consumers accelerated to 3.74%, although this figure was below expectations. The underlying index rose to 4.26%.
- What is Banxico’s likely next move? Last month, Banxico moderated the magnitude of interest rate adjustments by reducing the benchmark rate by 25 basis points. The central bank’s latest statement suggests further reductions are on the horizon, with another cut anticipated in tomorrow’s decision.
