Mexican Peso strengthens on soft US CPI, focus shifts to Banxico rate 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.