- Mexican Peso edges higher as softer US inflation fuels risk appetite.
- Traders await key Fed remarks on Wednesday ahead of Banxico’s rate decision on Thursday.
- USD/MXN retreats following US CPI miss as traders await Fed signals.
The Mexican Peso (MXN) is exhibiting upward momentum against the US Dollar (USD) on Tuesday, buoyed by a resurgence in global risk appetite and escalating expectations that the Federal Reserve may adopt a more accommodative monetary policy stance. This sentiment follows the release of US inflation data at 12:30 GMT, which indicated a slower pace of price increases than anticipated.
As of this writing, the USD/MXN pair is trading in the vicinity of 19.545, reflecting a 0.48% decline for the day. Market participants are strategically positioning themselves ahead of forthcoming commentary from Federal Reserve officials and the impending policy decision from the Bank of Mexico (Banxico), slated for release on Thursday.
Mexican Peso strengthens after US CPI miss
The US Consumer Price Index (CPI) report for April revealed a discernible easing of inflationary pressures. The headline CPI registered a 0.2% month-over-month increase, falling short of the consensus forecast of 0.3% and rebounding from a -0.1% contraction in March.
On a year-over-year basis, the headline inflation rate decelerated to 2.3%, also missing market expectations of 2.4%. The core CPI, which excludes volatile food and energy components, advanced by 0.2% month-over-month—below the anticipated 0.3%, yet marginally above the 0.1% recorded in the preceding month. Annually, the core CPI remained unchanged at 2.8%, aligning with projections.
The weaker-than-expected inflation figures have amplified the likelihood of the Federal Reserve implementing policy easing measures later in the current year. Market participants are closely monitoring economic indicators to gauge the Fed’s potential response.
According to the CME FedWatch Tool, market expectations continue to reflect the anticipation that the US central bank will implement a 25-basis-point reduction in interest rates during its September meeting. This expectation is subject to change based on incoming economic data and Fed communications.
Following the downside surprise in April’s inflation print, upcoming remarks from Fed speakers, including Governors Waller, Jefferson, and Daly on Wednesday, and Chair Jerome Powell on Thursday, may provide further clarity regarding the Federal Reserve’s commitment to maintaining steady interest rates or its potential shift toward a more dovish policy orientation.
Banxico is expected to continue on a dovish path
The Bank of Mexico (Banxico) is widely anticipated to reduce its benchmark interest rate by 50 basis points to 8.5% at its forthcoming policy meeting on Thursday.
According to a Reuters poll published on Monday, 30 out of 31 economists foresee this outcome, despite inflation remaining near the upper threshold of Banxico’s target range. In its most recent policy statement, the central bank indicated that further significant adjustments to interest rates could be considered in future meetings, contingent upon prevailing inflation dynamics.
As Banxico continues its easing cycle while the Federal Reserve maintains rates at their current levels, the narrowing interest rate differential between Mexico and the United States typically diminishes the attractiveness of peso-denominated assets for investors seeking higher yields. However, the recent appreciation of the Peso suggests that this divergence may already be largely factored into market valuations, with market focus now shifting toward forward guidance and broader external risk sentiment.
Mexican Peso daily digest: Peso rallies after US CPI miss; Banxico decision up next
- A 0.50% rate cut by Banxico on Thursday would represent the third consecutive reduction of this magnitude and the seventh consecutive rate cut since the central bank initiated its monetary easing cycle in June 2024. This decision is underpinned by a sustained moderation in inflation, which currently stands at 3.93%, within Banxico’s target range of 3% +/- 1%.
- The Mexican economy continues to face headwinds, providing further justification for interest-rate reductions. Mexico’s Gross Domestic Product expanded by 0.2% in the first quarter, following a contraction in the preceding quarter, while industrial output for March exhibited only a modest year-over-year increase of 1.9%.
- Mexico’s Finance Minister Edgar Amador expressed “reasonable confidence” in the Treasury’s fiscal and growth projections for the current year, forecasting a healthy 1.9% growth in 2025, in contrast to the estimates of near stagnation projected by the majority of analysts.
- With the Federal Reserve maintaining elevated interest rates while Banxico pursues an easing policy, capital flows continue to favor US-denominated assets. This dynamic exerts persistent downward pressure on the Peso.
- Longstanding 25% US tariffs on Mexican steel, aluminum, and automobiles have elevated production costs and diminished Mexico’s export competitiveness, particularly within the manufacturing sector, a critical driver of economic activity.
- On Sunday, the US Department of Agriculture announced a 15-day suspension of cattle, horse, and bison imports from Mexico due to the spread of the New World screwworm. The measure will be reviewed monthly based on containment progress. Mexican President Claudia Sheinbaum criticized the suspension as “unfair,” citing its economic impact on agriculture. While not a primary determinant of peso weakness in isolation, the ban contributes to broader trade uncertainty.
- Mexico and the US are preparing for an early review of the United States-Mexico-Canada Agreement (USMCA), initially scheduled for 2026 and now anticipated to commence later this year. The review may potentially reshape trade regulations, tariffs, and labor provisions, thereby increasing uncertainty surrounding future economic conditions.
- Stronger commodity exports – particularly Oil and agricultural goods – provide some support to the Peso, but are insufficient to fully offset the currency’s structural headwinds stemming from policy divergence, trade tensions, and shifting capital flows.
Technical analysis: USD/MXN consolidates above former trendline resistance
The USD/MXN pair continues to trade within a narrow consolidation range, oscillating between key support at the April low of 19.42 and resistance at 19.60-19.65, which also aligns with a descending trendline originating from last month’s highs.
Despite several intraday attempts, the pair has thus far failed to decisively breach this resistance level. A sustained move above 19.60 could pave the way for a potential advance toward the 23.6% Fibonacci retracement level of the April-May trading range, situated at 19.81, followed by the 38.2% retracement level at 20.06.
However, downside risks persist should the support level at 19.42 be breached, potentially exposing the pair to further declines toward the 19.30-19.20 region. The 10-day Simple Moving Average (SMA), currently positioned around 20.22, is trending downward, reinforcing the prevailing bearish momentum.
USD/MXN daily chart
Meanwhile, the Relative Strength Index (RSI) is currently hovering around 41.44, indicating a market that remains biased to the downside below the neutral level of 50. Overall, the short-term outlook for the USD/MXN pair remains neutral to bearish unless the pair decisively surpasses the 19.60 resistance zone.
Banxico FAQs
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.
The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.
