Mexican Peso recovers against USD after US data undershoot estimates

Most recent article: Mexican Peso soars amid mixed US CPI, US Dollar dips

• The Mexican Peso recovers against the US Dollar after the release of US Consumer Price Index (CPI) data. 
• US CPI rises at a slower-than-expected 0.3% pace in April versus estimates of a 0.4% rise. 
• Commentary from the Governor of the Banxico and robust economic data for its key peers weigh on the Peso

The Mexican Peso (MXN) recovers versus the US Dollar (USD) on Wednesday after the release of US Consumer Price Index (CPI) and Retail Sales data for April came out lower than economists had expected. The data puts back on the table the possibility the Federal Reserve (Fed) may cut interest rates sooner than had previously been thought. Lower interest rates or their expectation are negative for a currency since they reduce foreign capital inflows. The release of the data therefore led to a deppreciation in USD across the board. 

Prior to the data, the Mexican Peso had weakened for two days running in most of its pairs, on the back of comments from the Governor of the Bank of Mexico (Banxico), Victoria Rodríguez Ceja, and strong economic data from rivals. 

At the time of writing USD/MXN is trading at 16.85, EUR/MXN is trading at 18.29 and GBP/MXN at 21.29. 

Mexican Peso rebounds after lower than expected US CPI and Retail Sales data

The Mexican Peso rebounded against the US Dollar on Wednesday after the release of US CPI and Retail Sales data revealed signs of disinflation and lower economic activity in the US which hurt the USD. 

Headline CPI rose 0.3% in April which was below expectations of 0.4% and March's 0.4%. On a year-over-year basis CPI met expectations of a 3.4% rise, which was below the 3.5% YoY of the previous month of March, according to data from the US Bureau of Labor Statistics.

CPI ex Food and Energy came out in line with expectations, rising 0.3% MoM in April and 3.6% YoY, but this was still lower than the 0.4% and 3.8% of the prior month respectively. 

US Retail Sales in April, meanwhile, came out well below expectations, registering 0.0% growth in April when 0.4% had been estimated, down from 0.6% in March, according to data from the US Census Bureau released at the same time. The fall in retail sales sounded another note of caution regarding the US economy that could further encourage Fed officials to consider cutting interest rates. 

The combination of disinflation reflected in the CPI data and flatlining Retail Sales may prompt the Fed to consider cutting interest rates in the near term, a move that would weigh on both the US Dollar (USD) and USD/MXN. 

In Europe, meanwhile, the preliminary Gross Domestic Product (GDP) data for the first quarter came out in line with economists’ expectations, revealing a GDP growth rate of 0.3% in Q1 on a quarterly basis, and 0.4% YoY. 

Mexican Peso weakens for two days in a row

The Mexican Peso finished Tuesday in the red, dropping for the second day in a row in its most heavily traded pairs.

The decline was partially due to commentary from the Governor of the Bank of Mexico Victoria Rodríguez Ceja on Monday, who hinted Banxico might consider cutting interest rates in June. The expectation of lower interest rates is negative for a currency as it reduces foreign capital inflows.  

Ceja commented, “We could evaluate downward adjustments” to the main reference rate at the Banxico June 27 policy meeting. She went on to note that while headline inflation had continued to rise, underlying prices had not, but much depended on the evolution of the inflationary outlook, reported Christian Borjan Valencia, Editor at FXstreet. 

Banxico cut its policy rate from 11.25% to 11.00% at the March meeting, the first rate cut since 2021. However, it chose to keep the policy rate unchanged at the May meeting due to persistent inflationary forces. 

Technical Analysis: USD/MXN pull back hits key resistance level 

USD/MXN – the value of one US Dollar in Mexican Pesos –  has risen to a key resistance level at roughly 16.86, which corresponds with the base of the range it traded in during the second half of April and the first half of May. 

USD/MXN had previously broken out of the range and declined sharply to a low of 16.72 on Friday May 10, however, it stalled and reversed course. Since then, it has been making a steady recovery.

USD/MXN 4-hour Chart 

The recovery move has now met resistance from the previous range floor. The move could be what technical analysts call a “throwback” – a temporary rebound that happens after breakouts whereby the price returns to the original breakout level to “air kiss” it goodbye one final time before continuing lower. 

If this is the case, the pair will probably soon resume its downtrend and eventually surpass the May 10 lows before reaching the conservative target for the breakout, the 0.681 Fibonacci ratio of the height of the range extrapolated lower, at 16.54.  Further bearishness could even reach 16.34, the full height of the range extrapolated lower. 

A break below the May 10 lows at 16.72 would provide extra confirmation of a continuation south. 

Given the medium and long-term trends are bearish, the odds further favor more downside for the pair in line with those trends. 

A decisive break back inside the range, however, would reverse the downtrending bias in the short-term and suggest the pair is moving higher. It would also negate the price targets for the breakout.

A decisive break would be one accompanied by a longer-than-average green candlestick that closed near its high or three green candlesticks in a row.