Mexican Peso steadies as US-Mexico tension and policy divergence dominate focus

• The Mexican Peso holds steady despite rising political tension between Mexico and the United States.
• Markets are watching the Federal Reserve and the Bank of Mexico for policy direction.
• The USD/MXN exchange rate tests trendline resistance.

The Mexican Peso (MXN) remains resilient against the US Dollar (USD) in Monday's European session despite rising tensions over the weekend between Mexican President Claudia Sheinbaum and US President Donald Trump regarding a rejected proposal to deploy American troops in Mexico.

Fresh signs of slowing momentum in the US economy emerged Monday as the S&P Global US Composite Purchasing Managers Index (PMI) came in at 50.6 for April, down from 53.5 in March and below both the flash estimate (51.2) and market consensus (51.4). The reading, which captures activity across both the manufacturing and services sectors, reinforces concerns that the US economy is cooling more rapidly than expected. 

With the USD/MXN exchange rate trading at 19.617, 0.17% higher from Friday's close at the time of writing, markets remain focused on upcoming US economic data, Federal Reserve interest rate expectations, and the broader risk environment for signs of the next potential catalyst that could drive the emerging market (EM) currency pair out of its recent range.

Over the weekend, Reuters reported that Mexican President Claudia Sheinbaum had turned down an offer from US President Donald Trump to allow US troops into Mexico to combat drug trafficking. Speaking at a public event in Texcoco, Sheinbaum reiterated Mexico's position on sovereignty, stating, "We can work together, but you in your territory and us in ours." On Sunday, Trump confirmed the proposal, calling cartel violence a major threat and referring to drug gangs as "horrible people."

Mexican Peso steady as geopolitics and central bank signals shape USD/MXN

While the exchange highlights long-standing sensitivities between the two nations, the Peso's muted response suggests investors are prioritising economic fundamentals, particularly monetary policy, over political noise.

The Mexican Peso remains highly sensitive to shifts in global risk sentiment and developments in the United States, which accounts for nearly 80% of Mexico's exports. As such, the direction of the USD/MXN pair is being shaped primarily by diverging interest rate expectations between the US Federal Reserve (Fed) and the Bank of Mexico (Banxico), alongside broader macroeconomic signals.

This week, market attention is firmly fixed on the upcoming Fed interest rate decision, scheduled for Wednesday, May 7. While the Federal Open Market Committee (FOMC) is widely expected to hold the federal funds rate at 4.25%, the key focus for investors will be the messaging that accompanies the decision. Specifically, the tone of Fed Chair Jerome Powell's post-meeting press conference will be critical in shaping expectations about the path of US interest rates in the second half of the year. 

For the USD/MXN pair, any indication that the Fed may begin easing policy sooner than anticipated could shift capital flows, reduce the yield advantage of the US Dollar, and offer renewed support to the Mexican Peso. Conversely, a more cautious or data-dependent stance may reinforce existing range-bound conditions, keeping the pair sensitive to incremental shifts in economic data and central bank communication.

Daily digest movers: Interest rates and economic outlook remain critical for USD/MXN

• According to the CME FedWatch Tool, markets are pricing in a 25-basis-point rate cut in July, as signs of softening US growth increase. A dovish tone from Powell this week could weigh on the US Dollar and support EM currencies like the Mexican Peso.
• Despite Friday's better-than-expected Nonfarm Payrolls (NFP) report, which showed strong job creation, stable unemployment, and rising Average Hourly Earnings, the US Dollar failed to gain traction, highlighting market caution around the timing of future rate moves.
• Banxico is scheduled to meet on May 15, following two consecutive 50-basis-point rate cuts that brought the benchmark rate to 9.00%. With inflation easing and growth subdued, markets expect another cut, though Banxico has signaled a cautious, data-driven approach.
• The Mexican economy grew 0.2% QoQ in Q1 2025, narrowly avoiding a technical recession. Gains were concentrated in agriculture and mining, while manufacturing contracted and services stagnated.
• The reintroduction of US tariffs on key Mexican exports, including vehicles and metals, has added pressure to Mexico's external sector and may weigh on growth and foreign investment in the months ahead.
  Global uncertainties, including slowing international demand, volatile commodity prices, and potential shifts in US trade or immigration policy, pose additional risks to the Peso and investor confidence in emerging markets.

Peso steady as USD/MXN stalls under descending trendline

From a technical standpoint, USD/MXN remains in a tight consolidation range just below the 10-day Simple Moving Average (SMA) at 19.5864 as the pair struggles to break free from a well-defined descending channel. 

The Fibonacci retracement is drawn from the April high of 21.0826 to the April low of 19.451, establishing a clear structure for potential reversal or continuation. The pair is currently testing the 100.0% Fibonacci placeholder at 19.4701, which has served as solid support in recent sessions. 

A sustained break below this zone could expose the 61.8% Fibonacci retracement level of the 2024 - 2025 move at 19.3721, opening further downside. 

On the upside, resistance is seen first at the 10-day SMA and then at 19.6910, with stronger resistance aligned near 19.8152 (78.6% Fibo Retracement). A descending trendline from the April peak continues to cap recovery attempts. 

Meanwhile, the Relative Strength Index (RSI) remains subdued below 40, indicating that bearish momentum is still in place. Although a Hammer candlestick appeared on April 24, it has not yet triggered any meaningful bullish follow-through, keeping the near-term bias tilted cautiously lower unless the pair breaks above descending trendline resistance.

USD/MXN daily chart