USD/MXN: Peso renews monthly high around 16.70 as Mexican GDP, US inflation/employment data loom

• USD/MXN drops to the lowest level in a month, pressured around multi-day low of late.
• Broad-based US Dollar pullback joins cautious optimism in the market to propel Mexican Peso.
• Mexico’s Q2 GDP eyed as Banxico Minutes highlighted inflation woes to defend hawks.
• Fed Chair Powell’s speech showed preference for restrictive policy ahead of US Core PCE Price Index, NFP.

USD/MXN refreshes the monthly low around 16.70 as bears cheer the broad US Dollar retreat amid a slightly positive outlook on early Monday. In doing so, the Mexican Peso (MXN) pair also justifies the market’s preparations for this week’s Mexican growth numbers, as well as the inflation and employment clues from the US.

US Dollar Index (DXY) prints the first daily loss while retreating from the highest level since June 01 as traders reassess last week’s hawkish comments from the Federal Reserve (Fed) policymakers, especially when the markets anticipate a sooner end to the hawkish cycle.

That said, the CME’s FedWatch Tool keeps suggesting a no rate hike in September despite Fed Chair Jerome Powell’s defense of hawkish monetary policy.

Fed’s Powell reiterated his defense for “higher for longer” rates while stating that the policy is restrictive but the Fed can’t be certain what neutral rate level is. The policymaker also added that there is substantial further ground to cover to get back to price stability while also stating that the economic uncertainty calls for agile monetary policy-making.

Apart from Powell’s speech, the comments of Federal Reserve Bank of Cleveland President Loretta J. Mester also appeared hawkish as she warned that the under-tightening would be worse than overtightening. The policymaker also added, “We are getting close to where we need to be with rates.” Further, Federal Reserve Bank of Philadelphia President Patrick Harker told Bloomberg that he doesn't see the need now for additional rate increases but added that he could call for more hikes if inflation retreat stalled.

Elsewhere, the softer prints of the US Purchasing Managers Index and Michigan Consumer Sentiment Index contrasted with mixed details of Durable Goods Orders, mid-tier activity data and inflation expectations. However, hawkish comments from Federal Reserve (Fed) Chairman Jerome Powell at the annual Jackson Hole Symposium helped the US Dollar Index (DXY) to post the fifth consecutive weekly gain while poking the three-month high.

At home, the latest Minutes of the Banxico cited the policymakers’ readiness for further rate hikes to tame the inflation woes, which in turn keeps the Mexican Peso (MXN) buyers hopeful despite hawkish bias about the Fed. Furthermore, the softer prints of the US Purchasing Managers Index and Michigan Consumer Sentiment Index contrasted with mixed details of Durable Goods Orders, mid-tier activity data and inflation expectations to prod the USD/MXN rebound especially when the market sentiment is slightly positive.

While portraying the mood, the benchmark 10-year Treasury bond yields snapped the four-week uptrend by posting minor weekly losses as it retreated from the highest level since 2007, before posting a corrective bounce to 4.25% at the latest. It should be noted that Wall Street closed positive the previous day but S&P500 Futures struggle for clear directions.

Moving on, Mexico’s second quarter (Q2) 2023 Gross Domestic Product (GDP) details will be crucial to watch for the USD/MXN traders ahead of the Federal Reserve’s (Fed) favorite inflation gauge, namely the Core Personal Consumption Expenditure (PCE) Price Index for July, and the US Nonfarm Payrolls (NFP).

Technical analysis

A six-week-old horizontal support around 16.69 precedes the multi-year low marked in July surrounding 16.62 to restrict the short-term downside of the USD/MXN pair, especially amid nearly oversold RSI (14).