Mexican Peso slips ahead of Fed decision, inflation data in focus

• Mexican Peso is down 0.58% as market braces for Fed meeting and April inflation figures from Mexico.
• Banxico faces pressure if CPI reaccelerates; current inflation remains within the target band.
• US-Mexico tensions rose after a report of a rejected military incursion proposal to combat cartels.

The Mexican Peso (MXN) began the week with losses of around 0.58% against the US Dollar (USD) ahead of a crucial week with the Federal Reserve (Fed) preparing to host its monetary policy meeting on May 7 and the announcement of Mexican inflation figures. At the time of writing, the USD/MXN trades at 19.67.

Market participants continued to digest US trade-related news, with Washington signaling possible deals with India, South Korea, and Japan. Although US President Donald Trump said that China wants a deal "very badly," Beijing's lack of confirmation of a start of discussions keeps investors on their toes.

Mexico's economic docket on Monday was absent, with traders eyeing the release of April's Consumer Price Index (CPI) on May 8. In March, inflation stood at 3.8% YoY and Core CPI at 3.64%. Although prices remained within the Banco de Mexico's (Banxico) 3% plus-or-minus 1% band, a further reacceleration would exert pressure on Banxico, which embarked on an easing cycle.

In other news, Reuters revealed that Mexican President Claudia Sheinbaum and US President Donald Trump discussed a US military incursion into Mexico to combat the drug cartels. Nevertheless, Sheinbaum turned down the offer, saying at an event, "We can work together, but you in your territory and us in ours."

Across the northern border, the Institute for Supply Management (ISM) revealed that services activity improved in April. A sub-component of the reading suggested that US businesses reported a jump in Prices Paid.

The USD/MXN remains sensitive to shifts in market mood as well. Traders are eyeing the Fed's monetary policy, with expectations of the US central bank keeping rates unchanged. Nevertheless, traders are eyeing Fed Chair Jerome Powell's tone at the post-meeting press conference.

Daily digest market movers: USD/MXN hovers near 19.70 on overall Peso's weakness

• With the upcoming Federal Reserve decision looming, the interest rate differential between both countries could influence the USD/MXN's direction. A hawkish Fed hold and a restrictive Powell stance could weaken the emerging market (EM) currency, lifting the exchange rate higher, with the key 200-day Simple Moving Average (SMA) eyed at 19.98.
• The ISM Services PMI rose to 51.6 in April, up from 50.8 and beating expectations of 50.6, signaling a modest improvement in service sector activity.
• Notably, the Prices Paid sub-index surged to 65.1--its highest since February 2023--up from 60.9, indicating a reacceleration in input inflation pressures.
• Mexico's inflation data, coming softer than expected, might influence Banxico to lower rates at the May 15 meeting. Banxico has reduced rates by 100 basis points (bps) in the last couple of meetings, and most analysts surveyed by Citi Mexico project another 50-bps interest rate reduction. This would reduce the interest rate difference between Mexico and the US, which so far favors the former.
• Even though Mexico's latest Gross Domestic Product (GDP) figures surprised the markets, with the economy dodging a technical recession, tariffs imposed on Mexican products, a reduced budget, and geopolitical uncertainties will continue to stress the country's finances and influence the Peso.

USD/MXN technical outlook: Mexican Peso remains bullish as USD/MXN stays below 200-day SMA

The USD/MXN downtrend remains intact, but it seems the pair found its foot, bottoming near the 19.46-19.50 range, with sellers unable to push prices lower. Buyers are gathering momentum as reflected by the Relative Strength Index (RSI); hence a test of the 200-day SMA at 19.98 is on the cards. A breach of the latter will expose the 20.00 mark, followed by the 100-day SMA at 20.26.

Conversely, the USD/MXN falling below 19.46 could exacerbate a fall towards the 19.00 mark, ahead of the June 28 high-turned-support at 18.59.