Mexican Peso rallies as soft US CPI drives USD/MXN lower ahead of Banxico decision

Mexican Peso ticks up as soft US inflation boosts risk sentiment. Markets await Wednesday’s Fed speeches ahead of Thursday’s Banxico rate decision. USD/MXN slips after US CPI miss. The Mexican Peso (MXN) is trading higher against the US Dollar (USD) on Tuesday, supported by a rebound in global risk appetite and rising expectations of a more dovish Federal Reserve stance following softer-than-expected inflation data released at 12:30 GMT. At the time of writing, USD/MXN is hovering near 19.470, down 1.00% on the day, as traders position ahead of key comments from Fed officials and the Bank of Mexico’s (Banxico) policy decision scheduled for Thursday. Mexican Peso strengthens after US CPI miss The April US CPI report revealed a clear moderation in inflation pressures. Headline CPI rose by 0.2% MoM, falling short of the 0.3% consensus and rebounding from a -0.1% decline in March. On a YoY basis, headline inflation slowed to 2.3%, also missing expectations of 2.4%. Core CPI, which strips out food and energy, rose by 0.2% MoM—below the 0.3% estimate, though marginally above the 0.1% reading from the prior month. On an annual basis, core CPI remained stable at 2.8%, in line with forecasts. The softer-than-expected inflation data has increased the probability of Fed policy easing later this year. According to the CME FedWatch Tool, markets continue to price in that the US central bank will cut rates by 25 basis points in September. Following the downside surprise in April’s inflation print, comments from Fed speakers, Governors Waller, Jefferson, and Daly on Wednesday, and Chair Jerome Powell on Thursday may offer further insight into whether the Fed is committed to holding rates steady or preparing to shift toward a more dovish stance. Banxico is expected to continue on a dovish path The Bank of Mexico (Banxico) is widely expected to cut its benchmark interest rate by 50 basis points to 8.5% at Thursday’s policy meeting. According to a Reuters poll published on Monday, 30 out of 31 economists anticipate this outcome despite inflation remaining near the upper bound of Banxico’s target range. In its most recent statement, the central bank signaled that further significant rate adjustments could be considered in upcoming meetings, provided inflation dynamics allow. As Banxico continues its easing cycle while the Federal Reserve holds rates steady, the narrowing interest rate differential between Mexico and the United States typically dampens the appeal of peso-denominated assets for yield-focused investors. However, the Peso’s recent strength suggests this divergence may already be largely priced in, with markets now turning their attention to 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 mark the third consecutive cut of this size and the seventh straight rate cut since the central bank began its monetary easing cycle in June 2024. The decision is driven by a continued moderation in inflation, which currently stands at 3.93%, within Banxico’s target range. The Mexican economy remains under pressure, another factor that supports interest-rate cuts. Mexico’s Gross Domestic Product expanded 0.2% in Q1, following a contraction in the previous quarter, while March industrial output showed only a modest 1.9% year-over-year increase. Mexico’s Finance Minister Edgar Amador stated he is “reasonably confident” about the Treasury’s fiscal and growth projections for the year, forecasting a healthy 1.9% growth in 2025, contrary to the estimates of a near stagnation, according to most analysts. With the Fed keeping interest rates elevated while Banxico moves toward easing, capital flows continue to favor US-denominated assets. This dynamic adds sustained downward pressure on the Peso. Longstanding 25% US tariffs on Mexican steel, aluminum, and automobiles have raised production costs and weakened Mexico’s export competitiveness, particularly in the manufacturing sector, a key engine 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 major driver of peso weakness on its own, 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), originally scheduled for 2026 and now likely to begin later this year. The review may reshape trade rules, tariffs, and labor terms, increasing uncertainty around future economic conditions. Stronger commodity exports – particularly Oil and agricultural goods – offer some support, but are insufficient to offset the Peso’s structural headwinds from policy divergence, trade tensions, and shifting capital flows. Technical analysis: USD/MXN retreats to prior trendline resistance USD/MXN continues to trade within a narrow consolidation range, holding between key support at the April low of 19.42 and resistance at 19.60-19.65, which also aligns with a descending trendline from last month’s highs. Despite several intraday attempts, the pair has recently failed to break above this ceiling. A sustained move beyond 19.60 could open the door toward the 23.6% Fibonacci retracement level of the April-May move at 19.81, followed by the 38.2% level at 20.06. However, downside risks remain if support at 19.42 gives way, potentially exposing the pair to further losses toward the 19.30-19.20 region. The 10-day Simple Moving Average (SMA), currently around 20.22, is sloping lower and reinforces the prevailing bearish momentum. USD/MXN daily chart Meanwhile, the Relative Strength Index (RSI) sits at around 39, indicating a market still biased to the downside below 50. Overall, the short-term outlook remains neutral to bearish unless the pair decisively breaks above the 19.60 resistance zone. Mexican Peso FAQs The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity. The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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. Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate. As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens. Source: https://www.fxstreet.com/news/mexican-peso-strengthens-on-improved-global-risk-sentiment-ahead-of-us-inflation-data-202505131107