Mexican Peso stalls close to YTD highs with FOMC Minutes and policy divergence back in focus
- The Mexican Peso loses ground as monetary policy divergence between the Fed and Banxico comes back in focus.
- The FOMC meeting Minutes take the center stage in the US ahead of Friday’s PCE inflation print.
- USD/MXN remains confined below the 10-day Simple Moving Average (SMA) at 19.33.
The Mexican Peso (MXN) is holding broadly steady against the US Dollar (USD) on Wednesday, remaining close to year-to-date highs, as investors await the release of the Federal Reserve’s (Fed) May Federal Reserve Open Markets 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 49.1% chance of a rate cut in September. For June and July meetings, the expectation is that the Fed will keep its benchmark rate at the current 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 struggles below trendline as bears defend resistance ahead of Fed Minutes
USD/MXN continues to trade within a downward trend, with prices capped beneath the 20-day SMA at 19.44.
After hitting a new year-to-date (YTD) low of 19.18 on Monday, a modest rebound in the US Dollar has pushed the pair to trendline resistance from the April decline at 19.29.
Momentum indicators remain weak, with the Relative Strength Index (RSI) flattening at around 39, indicating that while bearish momentum is present, the market is not yet in oversold territory.
With the downtrend currently intact, a break below 19.20 could draw attention to the October 2024 low at 19.11, which serves as the next significant support level.
A sustained break below this level could open the door to deeper declines toward 19.00, while any rebound would first need to reclaim 19.44 20-day SMA to shift short-term sentiment.
USD/MXN daily chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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