Mexican Peso soars to a three-week high as Banxico holds rates at 11.00%

Mexican Peso strengthens as the USD/MXN drops 0.21%, following April’s hot inflation report.
Consumer Price Index data shows prices remain above Banxico’s target range, hinting it may hold rates at 11.00%.
Banxico’s decision to hold rates, was blamed on elevated inflation, USD/MXN drops below 16.80.

The Mexican Peso rallied against the US Dollar after the Bank of Mexico (Banxico) decided to hold rates unchanged, citing the latest inflation data that suggested price pressures are reigniting. Headline inflation figures on a monthly and annual basis exceeded forecasts, but underlying measures edged slightly lower. The USD/MXN trades at 16.78, down 0.65%.

Banxico kept rates unchanged at 11.00%, citing the latest inflation figures as the main reason behind the Governing Council decision. Although the disinflation process is expected to continue, the central bank revised its economic projections.

The Bank of Mexico estimates that inflation would converge toward its 3% goal until the last quarter of 2025, later than March’s estimates for Q2 2025. Core inflation is projected to hit 3% in Q2 2025.

After the decision, the USD/MXN edged toward 16.80 and dived beneath the latter as the Mexican currency strengthened. This reaction shows that market participants are not expecting Banxico’s rate cuts in the near term.

Mexico’s economic docket revealed that the Consumer Price Index (CPI) for April showed that prices remain above Banxico’s 3% plus or minus 1% goal, which would likely prevent the Mexican central bank from continuing to ease policy.

Across the border, the US jobs market continued to show signs of cooling, with the number of Americans filling out unemployment benefits crushing estimates. Later, San Francisco Fed President Mary Daly will cross the newswires.

Daily digest market movers: Inflation in Mexico rises ahead of Banxico’s decision

Mexican Core CPI in April increased by 0.21% MoM, below the expected 0.24% and significantly lower than the previous month's increase of 0.44%. Meanwhile, headline CPI moderated to 0.20%, slightly above the forecast of 0.19% but below the prior month's 0.29%.
On an annual basis, underlying inflation rose by 4.37%, below estimates of 4.40% and March’s 4.55%. Headline inflation ticked up to 4.65%, up from 4.42%, exceeding forecasts of 4.63%.
Most bank analysts predict that Banxico will keep interest rates steady with a unanimous decision expected from the Governing Council. However, future meetings are anticipated to be more contentious, potentially leading to divided votes. This expectation arises from comments by two Deputy Governors, Irene Espinosa and Jonathan Heath, who have stated that inflation is still elevated, necessitating that interest rates stay put.
US Department of Labor revealed that Initial Jobless Claims for the week ending May 4 increased by 231K, above estimates of 210K, up from the previous week's 209K.
US labor market continues to cool. April’s Nonfarm Payrolls and the release of the latest unemployment claims data can put pressure on Fed officials, who acknowledged that risks to achieving its dual mandate on employment and inflation “moved toward better balance over the past year.”
Data from the futures market see odds for a quarter percentage point Fed rate cut in September at 86%, versus 55% ahead of last week’s FOMC decision.

Technical analysis: Mexican Peso gains traction as USD/MXN tumbles below 16.90

The USD/MXN remains biased to the downside, showcasinging the Peso’s strength as sellers remain in charge. Momentum depicted by the Relative Strength Index (RSI) in bearish territory hints that the exotic pair can be testing the 50-day Simple Moving Average (SMA) at 16.79, which is the immediate support level in the short term.

Once cleared, the USD/MXN would test the 2023 low of 16.62, followed by the current year-to-date low of 16.25.

On the other hand, if buyers claim the 100-day SMA at 16.93, that could sponsor a leg up to the 17.00 psychological level. A breach of the latter would expose the 200-day SMA at 17.17, followed by the January 23 swing high of 17.38 and the year-to-date high of 17.92.

Mexican Peso FAQs

What key factors drive the Mexican Peso?

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.

How do decisions of the Banxico impact the Mexican Peso?

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.

How does economic data influence the value of the Mexican Peso?

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.

How does broader risk sentiment impact the Mexican Peso?

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.

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