Created
: 2025.05.06
2025.05.06 20:38
The Mexican Peso (MXN) is under pressure against the US Dollar (USD) in Tuesday's European session as markets brace for the Federal Reserve's (Fed) monetary policy decision on Wednesday. USD/MXN is up 0.24% on the day, trading near 19.75 at the time of writing, after breaking above a key trendline and extending gains from Monday.
The move reflects a shift in risk sentiment, as recent US data has challenged expectations for early interest rate cuts. With investors repositioning ahead of Fed Chair Jerome Powell's comments, demand for the US Dollar has strengthened while the Peso and other Emerging Market (EM) currencies have lagged.
The latest move higher in USD/MXN has been driven by mixed signals from the US services sector. On Monday, the Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) surprised to the upside, rising to 51.6 in April, above the 50.4 consensus and the 50.8 reading in the previous month, suggesting ongoing resilience in the services sector business activity.
In contrast, the S&P Global US Services PMI dropped to 50.8, missing the preliminary estimate of 51.4 and marking the slowest pace of expansion in two years. The divergence points to an uneven economic recovery, with larger firms likely performing better than smaller, internationally exposed businesses.
For markets, the ISM report carried more weight, helping lift US Treasury yields modestly and refocusing attention on the Federal Reserve's monetary policy path. Higher yields increase the appeal of the US Dollar, while risk-sensitive assets like the Mexican Peso tend to underperform.
Meanwhile, political tensions between Mexico and the United States remain in the background.
Over the weekend, Mexican President Claudia Sheinbaum publicly rejected an offer by US President Donald Trump to deploy American troops in Mexico to fight drug cartels. Sheinbaum reaffirmed Mexico's sovereignty, stating: "We can work together, but you in your territory and us in ours."
Although the development has drawn diplomatic attention, markets have treated it as a background risk with limited direct impact on USD/MXN price action.
From a technical perspective, USD/MXN has broken above a descending trendline resistance drawn from the April high of 21.08, indicating a potential shift in short-term bias.
The pair is now trading around 19.75, its highest level in nearly two weeks, and has reclaimed ground above the 10-day Simple Moving Average (SMA), now acting as immediate support at 19.61.
Momentum indicators are improving, with the relative strength index (RSI) approaching the neutral level of 50, suggesting downside momentum has faded. Resistance is now in focus at the psychological barrier of 19.80, followed by the 23.6% Fibonacci retracement of the April move at 19.85.
On the downside, the reclaimed trendline and the 19.59 - 19.60 zone offer initial support, with stronger support seen at the April low of 19.47.
USD/MXN daily chart
In the world of financial jargon the two widely used terms "risk-on" and "risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a "risk-on" market, investors are optimistic about the future and more willing to buy risky assets. In a "risk-off" market investors start to 'play it safe' because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of "risk-on", stock markets will rise, most commodities - except Gold - will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a "risk-off" market, Bonds go up - especially major government Bonds - Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are "risk-on". This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of "risk-off" are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world's reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them - even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Created
: 2025.05.06
Last updated
: 2025.05.06
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