- The Mexican Peso weakens as the US Dollar strengthens on US-China trade deal optimism.
- The US-China trade deal to lower tariffs for 90 days bolsters demand for the Greenback.
- USD/MXN tests trendline resistance after rebounding from May lows.
- Banxico is expected to cut rates while the Fed holds steady, narrowing the yield gap and supporting USD/MXN appreciation.
The Mexican Peso (MXN) is currently trading at a disadvantage against the US Dollar (USD) during Monday’s European trading session. This decline is largely attributed to increased demand for the US Dollar following recent progress in US–China trade negotiations, coupled with the ongoing easing of monetary policy by Banco de Mexico (Banxico).
As of this writing, the USD/MXN exchange rate hovers around 19.52, marking a 0.37% increase for the day. Market participants are keenly awaiting Thursday’s Banxico policy announcement and assessing the broader implications of US tariff policies on Mexican exports, which are significant drivers of the Mexican economy.
US–China truce boosts demand for the US Dollar, exerting downward pressure on the Peso
On Monday, the United States and China jointly announced a 90-day pause in escalating tariffs, offering a temporary respite from global trade tensions that have been weighing on market sentiment. This development has improved investor confidence and alleviated concerns about a potential US-led economic downturn. Consequently, expectations have solidified that the Federal Reserve (Fed) may have greater flexibility to maintain current interest rates should economic conditions remain stable. The market is also factoring in recent stronger-than-expected US jobs data, which further reduces the likelihood of near-term Fed rate cuts.
Conversely, the Mexican economy continues to face headwinds from existing US tariffs on aluminum, steel, and automobiles. These tariffs, set at 25%, have increased the cost of Mexican goods in US markets, thereby diminishing their competitiveness and placing a burden on export-oriented industries. Recent economic data releases and commentary from Mexican policymakers have increasingly highlighted these challenges, indicating signs of a broader economic slowdown within Mexico.
In response to these economic pressures, Banxico has adopted a dovish monetary policy stance, implementing interest rate cuts at six consecutive policy meetings to stimulate economic growth and mitigate external pressures. The market consensus anticipates a further 50 basis-point (bps) reduction at Thursday’s upcoming rate decision. Such a move would further compress the interest rate differential between Mexico and the US, potentially making the Peso less attractive to foreign investors and adding to the upward pressure on the USD/MXN exchange rate.
Mexican Peso daily digest: Mexican Industrial Output in focus
- Mexican industrial output data for March, scheduled for release at 12:00 GMT, will be closely scrutinized for indications of stress within Mexico’s manufacturing sector.
- Weaker-than-anticipated figures could reinforce expectations for additional monetary easing by Banxico, which would likely exert further downward pressure on the Peso.
- With US Treasury yields remaining elevated and Mexico’s policy outlook becoming increasingly accommodative, capital flows have continued to favor the US Dollar, thereby exacerbating the downward pressure on the Peso.
- US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer convened with Chinese Vice Premier He Lifeng in Geneva over the weekend, where both parties reported positive developments. He characterized the discussions as “candid and constructive,” while the US delegation stated that “substantial progress” had been achieved toward resetting trade relations.
- The US has agreed to reduce tariffs on Chinese imports from 145% to 30% for a period of 90 days, providing a measure of relief to global supply chains that have been strained by trade disputes.
- Beijing has committed to lowering tariffs on US goods from 125% to 10% and has announced the suspension of key retaliatory countermeasures previously implemented.
- At 14:25 GMT, Fed Governor Adriana Kugler is scheduled to speak at the NABE-Central Bank of Ireland Symposium in Dublin. Investors will be closely monitoring her remarks for any policy signals amidst a backdrop of steady economic performance in the US.
- According to the CME FedWatch Tool, there is a 92.1% probability that the Federal Reserve will maintain current interest rates at 4.25–4.50% in June. The market is currently pricing in the first 25 bps rate cut for September, indicating a delayed expectation for monetary easing by the Fed.
- In contrast, Banxico has implemented rate cuts at six consecutive meetings and is expected to continue its easing cycle, further weighing on the Peso due to the narrowing interest rate differential between Mexico and the United States.
USD/MXN tests trendline resistance
USD/MXN remains trading within a narrow consolidation range above the key support level at 19.42, with price action exhibiting largely sideways movement in early May trading. The currency pair is currently testing a descending trendline resistance, which originates from the April high and aligns closely with the 10-day Simple Moving Average (SMA) at 19.58. This SMA has acted as a ceiling, capping multiple attempts to break higher over the past two weeks.
USD/MXN continues to fluctuate within a horizontal consolidation zone, bounded roughly by 19.42 and 19.65. The presence of a cluster of candles suggests market indecision as bullish traders attempt to regain short-term control. A decisive breakout above the trendline could signal a bullish reversal, potentially paving the way toward the 23.6% Fibonacci retracement level, calculated from the April 9 high of 21.08 to Monday’s low of 19.42, at 19.81. The 38.2% Fibonacci retracement level represents the next significant resistance point at 20.05.
USD/MXN daily chart
Conversely, failure to breach the trendline resistance could lead to renewed selling pressure. Key support remains at 19.42 (the April low), with further downside risk extending toward the 19.30–19.20 range if this support zone fails to hold.
Momentum indicators suggest a neutral to slightly bearish outlook. The Relative Strength Index (RSI), a momentum indicator, currently reads 41.16, remaining below the 50 midpoint, which reflects weak buying pressure. A sustained move by the RSI above 50 would be necessary to confirm a strengthening of bullish momentum in the USD/MXN pair.
Tariffs FAQs
Tariffs are customs duties levied on specific imported goods or categories of products. They are primarily designed to bolster the competitiveness of local producers and manufacturers by offering a price advantage over similar imported goods. Tariffs are commonly employed as instruments of protectionism, alongside other trade barriers and import quotas, to safeguard domestic industries.
While both tariffs and taxes serve as sources of government revenue to finance public services and goods, they differ in several key aspects. Tariffs are typically prepaid at the port of entry, whereas taxes are generally paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are levied on importers of goods.
Economists hold differing views regarding the use of tariffs. Some argue that tariffs are essential for protecting domestic industries and addressing trade imbalances, while others view them as potentially harmful, leading to higher prices in the long run and triggering damaging trade wars through retaliatory measures.
Leading up to the presidential election in November 2024, Donald Trump has consistently stated his intention to utilize tariffs to support the US economy and American producers. In 2024, Mexico, China, and Canada collectively accounted for 42% of total US imports. During this period, Mexico emerged as the leading exporter with $466.6 billion in goods, according to data from the US Census Bureau. Consequently, Trump aims to prioritize these three nations when implementing tariffs. He also intends to allocate the revenue generated from tariffs to reduce personal income taxes for American citizens.
