The Decline of USD/MXN and Anticipation of Monetary Policy Easing

The Decline of USD/MXN and Anticipation of Monetary Policy Easing

The USD/MXN exchange rate continues to fall for the third consecutive session, reaching near 17.00 during the early European trading hours. This decline is attributed to the weakening of the US Dollar, which has been struggling after poor US manufacturing data was reported in February. Despite a slight improvement in US Treasury yields, with the 2-year and 10-year standing at 4.55% and 4.20%, respectively, the US Dollar Index (DXY) remains under pressure, hovering around 103.80.

Federal Reserve President Raphael W. Bostic has indicated that any rate cuts are unlikely to occur until at least the end of 2024. This forward guidance suggests a stable interest rate environment, which provides support for the US Dollar. The CME FedWatch Tool shows a low probability of a rate cut in March, but there is an increased chance in May and June. Investors are eagerly awaiting Federal Reserve Chair Jerome Powell’s speeches later in the week for further insight into monetary policy.

On the other side, the Bank of Mexico (Banxico) is expected to introduce monetary policy easing in March. With a forecast of reducing interest rates by 75 basis points over the next six months, investors are closely monitoring Banxico’s actions. Deputy Governors Jonathan Heath and Omar Mejia have advocated for a cautious approach to rate adjustments, emphasizing the importance of maintaining higher rates for a prolonged period. Deputy Governor Irene Espinosa has stressed the need for Banxico to carefully analyze both internal and external factors that impact inflation when making policy decisions.

The USD/MXN exchange rate is on a downward trend due to the weak US Dollar and the anticipation of monetary policy easing by Banxico. The economic outlook remains uncertain, with ongoing concerns about inflation and interest rates. Investors will continue to monitor key events and data releases for further clarity on the future direction of the currency pair.

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