- The Mexican Peso declines as the divergence in monetary policy between the Fed and Banxico comes back into focus.
- The Fed Meeting Minutes take the spotlight ahead of Friday’s US PCE print.
- USD/MXN remains below trendline resistance, moving toward the 20-day SMA.
The Mexican Peso (MXN) has fallen against the US Dollar (USD) on Wednesday, following a steady climb as investors await the release of the Federal Reserve’s (Fed) May Federal Open Market Committee (FOMC) meeting minutes.
The report is expected to shed light on the Fed’s rationale for holding rates steady and its assessment of evolving economic risks, particularly those tied to President Trump’s escalating tariff measures.
Fed officials have maintained a cautious stance, opting to observe the full impact of these trade policies before adjusting the policy rate.
According to the CME FedWatch Tool, market participants are currently pricing in a 49.2% 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%.
Federal Reserve Bank of New York President John Williams, a FOMC voter, said on Wednesday that the Fed should respond “relatively stronger” when inflation begins to deviate from the target. “[I] want to avoid inflation becoming highly persistent because that could become permanent,” he said.
The FXStreet speech tracker, which gauges the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10 using a custom AI model, rated William’s words as hawkish with a score of 7.2. This is a significant deviation from the 5.8 average, signaling a shift toward a more hawkish tone.
If this narrative is reflected in the minutes, any changes to interest rate expectations could directly impact the US Dollar and, therefore, the USD/MXN exchange rate.
Mexican Peso daily digest: USD/MXN hinges on the Greenback
- Mexico’s central Bank, Banxico, is set to release the minutes from its latest policy meeting on Thursday, following its seventh consecutive rate cut on May 15.
- Markets will closely examine the commentary for signs of a potential pause in the easing cycle, particularly as policymakers weigh external risks such as US tariff threats.
- Thursday also brings a wave of high-impact data from the United States, including the second reading of the Q1 Preliminary Gross Domestic Product (GDP) and weekly Initial Jobless Claims, which directly form part of the Fed’s string of indicators it considers when deciding on rates.
- The core 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, as they gauge the feelings of US citizens about the current economic situation.
- On Tuesday, the US Dollar received some support after the publication of Consumer Confidence data from The Conference Board, which showed that households’ moods improved significantly after declining for five consecutive months. The rebound was partly attributed to the US-China trade deal.
Mexican Peso technical analysis: USD/MXN resistance, heads toward the 20-day SMA
USD/MXN has climbed above the prior trendline resistance from the April decline, reclaiming the 10-day Simple Moving Average (SMA), which now provides support at 19.33.
At the time of writing, the pair is heading toward the 20-day SMA, currently near 19.45, in an attempt to regain control of the trend.
After hitting a new year-to-date (YTD) low of 19.18 on Monday, the pair rebounded, with its trendline resistance from the April decline serving as additional support at 19.29.
Momentum indicators remain weak, with the Relative Strength Index (RSI) edging higher to 43, heading toward the neutral zone at 50.
USD/MXN daily chart
For the upside to gain momentum, a move above the 19.45 SMA resistance could see prices retest the April low of 19.47, allowing bulls to move toward the 78.6% Fibonacci retracement level of the October-February move near 19.58.
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.
