Mexican Peso regains confidence as US Dollar bulls retreat ahead of US Inflation data
- The Mexican Peso firms as the US Dollar fails to hold gains after rising Jobless Claims.
- Banxico Meeting Minutes highlights economic uncertainty, with a more cautious stance regarding potential rate cuts ahead of Friday's employment data.
- The USD/MXN slips back below 19.40 as investors look ahead to US Core PCE and Michigan Sentiment data.
The Mexican Peso (MXN) has strengthened against the US Dollar (USD) on Thursday after a combination of weak US employment data, the release of Banxico Minutes and renewed selling pressure on the Greenback limited earlier gains.
Following the release of the Banxico Minutes from the May Meeting, USD/MXN continued to erase losses from Wednesday's release of the Minutes from the Federal Open Market Committee (FOMC) Minutes that had supported a broader recovery in the US Dollar.
However, positive USD sentiment following the federal court ruling against US President Donald Trump's tariffs and the Fed's "wait-and-see" approach failed to transpire into a fresh bout out of optimism, pushing USD/MXN back below 19.40 at the time of writing.
For the United States, the tariff uncertainty continued after news reports stated that the Trump Administration was appealing the decision made against the reciprocal tariffs announced by trump on "Liberation Day". The appeal and unresolved tariff and trade uncertainty refuelled USD weaker that was placed under additional pressure after the Initial and Continuing Jobless Claims numbers rose above analyst forecasts.
The US labour market shows signs of weakening, weighing on USD/MXN
The weaker data highlighted a weakening in the US labour market, a sector that is monitored closely by the Fed. That brings Friday's Core Personal Consumption Expenditure (PCE) data for April and Michigan Sentiment into focus as investors continue to look for signs of when the Fed may pivot from its restrictive stance toward monetary policy.
For Mexico, the Banco de México’s (Banxico) Quarterly Report on Wednesday had flagged rising domestic recession risks, cutting the 2025 GDP growth forecast sharply to 0.1% and reinforcing a cautious policy outlook. Thursday's Banxico Minutes reported that 'most members indicated that the balance of risks for economic activity remains biased to the downside' while 'all members highlighted the risks associated with a possible intensification of uncertainty regarding the US trade policy'.
As Mexico's policymakers monitor the ongoing economic developments within their own borders, Friday's Jobless Rate scheduled for 12:00 GMT is expected to show the unemployment rate rising to 2.5% in April, up from 2.2% in March. A higher than expected reading could raise expectations that Banxico could implement additional rate cuts to stimulate the economy. If markets anticipate further restrictive measures to be implemented in the near-term, this could weigh on the Peso.
Mexican Peso daily digest: USD/MXN bears step in ahead of US Core PCE data
- On Thursday, Weekly Initial Jobless Claims for the United States rose to 240K vs 226K while Continuing Jobless Claims rose to 1.919M vs 1.893M.
- Pending Home Sales (MoM) for April showed a dramatic decrease in the demand for new homes, with sales falling 6.3% vs a 5.5% increase.
- US Core PCE for April is expected to show an increase from 0% in March to 0.1% in April with a YoY reading of 2.5%, slightly lower than the previous 2.6% print.
- At the May meeting, Banxico Governor Victoria Rodriguez Ceja stated that the governing board estimates it could continue calibrating the monetary stance and consider adjusting it by a similar amount as the May 50-bps cut.
- On Wednesday, the tone of the Federal Reserve Open Market Committee (FOMC) Minutes aligned with market expectations, as policymakers emphasized a need to assess the full impact of trade measures and inflationary pressures before adjusting policy. “Participants agreed that uncertainty about the outlook had increased and it was appropriate to take a cautious approach to monetary policy,” the Minutes said.
- According to the CME FedWatch Tool, market participants are currently pricing in a 48.3% chance of a rate cut in September. For June and July meetings, the expectation is that the Fed will maintain its benchmark rate at the current range of 4.25%-4.50%.
- The Banxico Q1 Quarterly Report for January-March acknowledged rising recession risks for the Mexican economy, downgrading the 2025 GDP growth forecast from 0.6% to 0.1%. Despite the downgrade, the central bank maintained a cautious policy stance. It stated, “The reference rate is expected to remain in restrictive territory for an extended period,” suggesting that future cuts will be gradual and data-dependent.
- The Core Personal Consumption Expenditure (PCE) figures for April – the Fed's preferred inflation measure – and the final University of Michigan Consumer Sentiment figures are both scheduled for release on Friday. With the Fed reiterating its 'data-dependent' stance, these data points are crucial for understanding inflation and consumer sentiment.
Mexican Peso technical analysis: USD/MXN retreats from Moving Average resistance
USD/MXN is trading below the 19.40 psychological level that came back into play as resistance after bulls failed to rise above the 20-day Simple Moving Average (SMA) of19.43 on Thursday.
With prices returning to the 10-day SMA of 19.32, the April low rests just below at 19.31, a break of which could see bears driving the USD/MXN back toward the May low of 19.18.
The Relative Strength Index (RSI) is at 41, showing a modest increase in bearish momentum.
With the RSI still above the 30 level, sellers the pair is still trading in neutral territory, despite a slight bearish bias.
USD/MXN daily chart
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Tammy Da Costa, CFTe®
FXStreet
Tammy is an economist and market analyst with a deep passion for financial markets, particularly commodities and geopolitics.
