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USD/MXN remains on the defensive near 19.00 ahead of US CPI release

  • USD/MXN softens to around 19.05 in Wednesday’s early European session. 
  • The US and Mexico discussed a deal to cut Trump's steel tariffs. 
  • Traders await the US May CPI inflation data later on Wednesday. 

The USD/MXN pair remains on the defensive near 19.05 during the early European session on Wednesday. The Mexican Peso (MXN) strengthens against the US Dollar (USD), its strongest level in more than nine months, bolstered by a potential trade deal between the United States and Mexico. 

The United States and Mexico are discussing a deal to reduce or remove US President Donald Trump's 50% steel tariffs on imports up to a certain volume, per Reuters. The agreement hasn’t been finalized, however, an industry source familiar with the talks said that it would allow US companies to import Mexican steel tariff-free as long as total shipments are kept below a level based on historical trade volumes.

Traders will keep an eye on the US May Consumer Price Index (CPI) inflation data, which is due later on Wednesday. The headline CPI is expected to see an increase of 2.5% YoY in May, while the core CPI is estimated to see a rise of 2.9% YoY in the same period. If the report shows softer inflation in the US economy, this might drag the Greenback lower.

On the other hand, the US Federal Reserve (Fed) will keep interest rates on hold for at least another couple of months, according to Reuters polls, citing inflation risks triggered by Trump's tariff policies. All but two of the 105 economists in the June 5-10 Reuters poll forecast that the US central bank would keep the Fed Funds Rate unchanged at its June meeting in a 4.25%-4.50% range, where it has been since the start of the year. The cautious stance of the Fed might lift the USD in the near term. 

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.



 

 

 

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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