USD/MXN retreats towards 17.5000 as Mexican inflation cools, US job market tightens

• USD/MXN drops 0.30% to 17.5300 as Mexico’s inflation falls to 4.64%, meeting market expectations and signaling a cooling economy.
• US jobless claims below forecasts at 216K, but the Mexican Peso gains ground, challenging the Fed’s neutral stance on rate hikes.
• USD/MXN faces strong resistance at 18.0000, with potential triggers for volatility, including Fed surprises and Mexico’s 2024 general election.

The Mexican Peso (MXN) recovered some ground against the US Dollar (USD) on Thursday, although Mexico’s economy deflates while the US jobs market remains tight. Hence, the USD/MXN is trading at 17.5300, a loss of 0.30%, after hitting a daily high of 17.7074.

Mexican Peso gains against the US Dollar despite a strong US labor market, as inflation in Mexico drops

The Instituto Nacional de Estadistica Geografia e Informatica (INEGI) revealed that inflation in Mexico dropped to its lowest level since March 2021, at 4.64%, as expected by market analysts. Core inflation, which excludes volatile items, slowed sharply to a 20-month low in August at 6.08%, below the foreseen 6.12%.

Jonathan Heath, a Deputy Governor of the Bank of Mexico (Banxico), said in social media X that core inflation was “good news” while adding, “There is still a long way to go.” Recently, some Banxico officials stressed the need to maintain higher rates as the central bank curbs inflation.

Across the border, the US Bureau of Labor Statistics (BLS) revealed that unemployment claims rose by 216K, beneath 229K forecasts on the week ending September 2, flashing a tight labor market. Even though the Greenback (USD) appreciated against most G8 currencies on the news release, the Mexican Peso outweighed the former, as the USD/MXN continued to trend downwards.

Fed officials have become more neutral, as data suggests prices are cooling down. But the resilience of the US jobs market puts the US central bank at a crossroads between doing too much and triggering a recession or perhaps under-tightening and suffering the consequences of an acceleration of inflation.

Meanwhile, the CME FedWatch Tool depicts money markets have fully priced in the Fed will keep rates unchanged in September. But for November, chances of a 25 bps increase lie at 43.5%.

Given the recent developments in both economies, the USD/MXN is set to print more gains, though it would face strong resistance at 18.0000. Any hawkish surprises by the Fed and next year’s Mexico general election could trigger outflows from the emerging market currency.

USD/MXN Price Analysis: Technical outlook

From a technical standpoint, the USD/MXN is neutral to upward biased. Still, today’s pause could spur some consolidation as bulls recharge batteries to challenge the 18.0000 psychological figure. Even though a pin-bar is forming, a daily close below September’s 6 low of 17.3912 could pave the way for a deeper correction. Otherwise, a break above 17.7074 and the pair could reach 18.0000.