Mexican Peso celebrates YTD highs ahead of Fed Powell’s remarks

The Mexican Peso strengthens, supported by steady demand for risk assets. The Peso’s short-term trajectory will largely depend on Banxico’s next rate decision. USD/MXN slides as Dollar declines accelerate, with the pair vulnerable to deeper losses if bearish sentiment continues. The Mexican Peso (MXN) posts a second consecutive day of gains on Wednesday against the US Dollar (USD), slipping below 19.40 ahead of key commentary from Federal Reserve (Fed) officials that could influence the monetary policy outlook. At the time of writing, USD/MXN is trading 0.33% lower at 19.36 as markets continue to digest Tuesday’s softer US CPI data, narrowing interest rate differentials, and resilient investor sentiment toward emerging markets. The April US Consumer Price Index (CPI) report released Tuesday came in below expectations, signaling further easing in inflation and reinforcing market confidence in a potential rate cut by the Federal Reserve later this year. With the Fed keeping rates unchanged at its last meeting, markets continue to price in the first rate cut for September. However, upcoming commentary from central bank officials will be crucial in determining whether this timeline holds. On Wednesday, Vice Chair Philip Jefferson, a voting member, and San Francisco Fed President Mary Daly, a non-voting member, delivered remarks that offered limited reaction to the recent softer inflation data, reaffirming the Fed’s data-dependent approach. This sets the stage for Thursday, when Fed Chair Jerome Powell is expected to speak. His comments will be closely scrutinized for any shift in policy tone following the latest CPI report, with the US Dollar’s near-term direction particularly sensitive to any dovish or hawkish signals from this key appearance. Banxico is expected to cut rates on Thursday The Bank of Mexico (Banxico) will announce its latest interest rate decision on Thursday at 19:00 GMT, and analysts widely expect a third consecutive 50 basis-point cut (0.5%), which would bring the benchmark rate to 8.5%. The timing is especially significant given the contrast in policy direction between the US and Mexico. With the Fed expected to hold rates steady until at least September and Banxico accelerating its easing cycle, the narrowing interest rate differential is reducing the Mexican peso’s yield advantage. While Mexico’s inflation outlook supports further easing, the diminished appeal of the Peso relative to the Dollar may weigh on MXN in the near term, particularly if Fed officials push back against imminent rate cut expectations in the wake of the softer CPI data. Mexican Peso daily digest: Fed and Banxico divergence drive USD/MXN outlook Banxico has cut rates at six straight meetings since August, so a 0.50% cut on Thursday would mark a cumulative 2.5% reduction over seven decisions. In contrast, the Fed has cut rates three times since July, lowering its benchmark rate from 5.25%-5.50% to 4.25%-4.50% by January. Escalating trade tensions with the US threaten Mexico’s export-driven economy, as the US accounts for over 80% of Mexican exports; tariffs could disrupt manufacturing, weaken investor confidence, and slow economic growth. The US has imposed 25% tariffs on Mexican goods not covered by the USMCA, including steel and aluminium alluminimum, steel and auto March, citing concerns over border security and fentanyl trafficking. According to Reuters, Mexico’s Economy Minister, Marcelo Ebrard, has proposed starting the USMCA review this year, ahead of the formal 2026 timeline, stating that the goal is “to give investors and consumers greater certainty” amid rising US-Mexico trade tensions. The USMCA is the foundation of North American trade, governing over $1.5 trillion in annual commerce and ensuring stability for cross-border supply chains, jobs, and investment. USD/MXN extends bearish descent USD/MXN extends its decline on Wednesday following Tuesday’s drop, breaking below the key horizontal support at the April low of 19.42. The pair has now exited the month-long consolidation range, marked by multiple failed attempts to recover above the 20-day moving average at 19.59 and the 23.6% Fibonacci retracement level of the April decline at 19.81. With this decisive move lower, the Peso has reached its strongest level since October, reinforcing a bearish breakout. The Relative Strength Index (RSI) at 36.86 confirms building downside momentum, though it is not yet oversold, leaving room for further losses. USD/MXN daily chart If bears maintain control, the next support zone lies near 19.30, close to the October 14 swing low. However, a daily close back above 19.42 would neutralize the bearish structure, exposing the pair to a potential rebound toward 19.81 and, if momentum builds, the psychological 20.00 handle, which aligns with the 38.2% Fibonacci level at 20.06. Risk sentiment FAQs In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest. Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit. The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity. The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection. Source: https://www.fxstreet.com/news/mexican-peso-hits-fresh-ytd-high-as-banxico-rate-cut-fed-signals-and-us-trade-tensions-loom-202505141153