Mexican Peso extends uptrend after US Services data undershoots

The Mexican Peso’s valuation against the US Dollar rose after the release of US ISM Services PMI data on Wednesday. Figures for March showed an unexpected decline to 51.4 from 52.6 previously, when a slight rise to 52.7 had been expected. 

Perhaps of more importance, was the acute fall in the ISM Services Prices Paid component, which measures inflation in the sector. It showed a decline to 53.4 in March from 58.6 in February. 

The Prices Paid component is significant for the US Dollar and USD/MXN because Services inflation is considered particularly sticky by economists and the Federal Reserve (Fed) has said it is watching price pressures in the sector carefully as it deliberates whether or not to cut interest rates. 

Lower interest rates or their expectation thereof are negative for the US Dollar as they reduce its attractiveness to foreign capital, lowering inflows. 

Given the sudden step-decline in Services inflation revealed by the Price Paid metric it suggests a greater possibility the Fed may decide to cut interest rates as soon as June, as had been previously expected. 

Recent strong US data and the threat of resurgent inflationary forces had pushed back  bets of a June rate cut or even suggested the Fed might wait till 2025. 

However, the March Services’ data has increased the probability once again of the Fed cutting in June, raising it back above the 60%-chance level, according to the CME FedWatch tool, a market-based gauge of future policy moves.