Mexican Peso slips despite strong Retail Sales, Banxico dovish bets weigh

• Mexican Peso weakens 0.24% even as DXY slips, reflecting Banxico rate cut expectations.
• Data shows resilient Retail Sales, but economic contraction fuels a dovish policy outlook.
• Citi survey predicts Banxico cutting 50 bps this week; markets also eye US PCE inflation print.

The Mexican Peso (MXN) dips against the US Dollar (USD) in early trading during Tuesday's North American session, as the emerging market currency fails to advance following a strong Retail Sales report for January, released by the Instituto Nacional de Estadística, Geografía e Informática (INEGI). At the time of writing, USD/MXN exchange rate is 20.07, up 0.24%.

The Peso remains on the defensive, even though the Greenback posts losses, as depicted by the US Dollar Index (DXY). The DXY, which measures the performance of the American currency against other six, falls 0.23% and clings to the 104.00 figure.

INEGI reported that consumers continue to spend at a good pace, as revealed by Retail Sales. Nevertheless, January's economic contraction and the dip in mid-month inflation in March had increased the odds that Banco de Mexico (Banxico) would reduce interest rates by 50 basis points (bps) at its Thursday meeting, from 9.50% to 9%.

The Citi Expectations Survey revealed that most private economists expect Banxico to reduce rates by 50 basis points. According to the survey, Mexico's primary reference rate is expected to end 2025 at 8%, down from 8.25%.

Given the backdrop, further upside is seen in USD/MXN. However, if US President Donald Trump makes tariff exemptions to Mexico, the outlook for the economy could improve. Hence, the Peso could strengthen and exert downward pressure on the exotic pair.

Ahead this week, Mexico's docket will feature the Balance of Trade and Banxico's interest rate decision. Across the border, the US schedule will feature the release of the Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Price Index.

Daily digest market movers: Mexican Peso drops ahead of imminent Banxico rate cut

• Mexico's Retail Sales in January grew by 0.6% MoM, up from December's 0.1% and estimates of 0.1%. In the twelve months to January, sales rose by 2.7%, up from a contraction of 0.2%, crushing forecasts of 1.1%.
• On Monday, the Consumer Price Index (CPI) for the first half of March dipped compared to estimates on both a monthly and annual basis. Core inflation stood within Banxico's target of 3% plus or minus 1% on inflation.
• The Citi Mexico Expectations Survey revealed that analysts expect interest rates to end at 8% in 2025, down from 8.25% in the previous release. USD/MXN is expected to end at 20.98, down from 21.00 in the last survey.
• Inflation expectations remained anchored in the high 3% range, while GDP is foreseen to expand by 0.6%, down from 0.8% in the last survey.
• Traders had priced the Fed to ease policy by 65 basis points (bps) throughout the year, as revealed by data from the Chicago Board of Trade.

USD/MXN technical outlook: Mexican Peso loses traction as USD/MXN rises past 20.10

USD/MXN trade has been choppy, consolidating around the 20.00-20.20 range for the last couple of days, with neither buyers nor sellers able to break the range. It's worth noting that the pair is tilted to the downside after sellers cleared strong support at the 50 and 100-day Simple Moving Averages (SMAs) at 20.38, 20.22, which exacerbated the downtrend below 20.20.

For a bearish continuation, a drop below 20.00 is needed. If cleared, nothing is in the way to test the 200-day SMA at 19.70, followed by the September 18 swing low of 19.06. On the other hand, if bulls clear the 20.20 mark, the USD/MXN pair would be poised to test the confluence of the 100 and 50-day SMAs, ahead of the 20.50 area.