Mexican Peso firms as US trade deficit widens, Trump softens tariff rhetoric

• Mexican Peso pares losses after Trump signals openness to "low and fair" tariffs and potential USMCA renegotiation.
• US trade deficit widens more than expected, pressuring the US Dollar ahead of Fed policy decision.
• Traders eye Mexico's CPI release on May 8 for clues on Banxico's next rate move.

The Mexican Peso recovered some ground on Tuesday against the Greenback as traders digested the latest Trade Balance figures of the United States (US), which showed the trade deficit widened. A scarce economic docket in Mexico keeps traders awaiting the release of inflation figures and Wednesday's US Federal Open Market Committee (FOMC) monetary policy meeting. At the time of writing, the USD/MXN trades at $19.67, down 0.08%.

Risk appetite remains depressed ahead of the FOMC meeting. US trade policies continued to grab the headlines as US President Trump said he is open to imposing low and fair tariffs on partners seeking to avoid higher duties. He added, "It's going to be a very fair number, it'll be a low number. We're not looking to hurt countries."

Trump added that he's willing to begin discussions to renegotiate the USMCA free trade agreement at a reunion with Canada's Prime Minister Mark Carney.

The Mexican Peso rallied on Trump's comments, with the USD/MXN paring earlier gains and turning negative on the day. Meanwhile, traders await the release of Mexico's Consumer Price Index (CPI) report on May 8. This follows a slight increase in April's mid-month inflation report, which showed a jump in prices, though it remained within Banco de Mexico's (Banxico) 3% plus or minus 1% inflation goal.

The US Balance of Trade revealed the US deficit widened more than expected, according to the US Department of Commerce.

Daily digest market movers: Mexican Peso modestly appreciates ahead of Fed's meeting

• USD/MXN traders are awaiting the upcoming Federal Reserve decision. If the Fed holds rates unchanged, the interest rate differential will remain unchanged. However, if Mexico's inflation edges lower, according to May 8 data, expectations that Banxico would reduce borrowing costs by 50 basis points (bps) on May 15 would increase.
• Citi Mexico Expectations Survey shows that most analysts estimate Banxico to cut rates by 50 bps.
• The US Commerce Department revealed that the Balance of Trade was $-140 billion higher than expected, at $-137 billion, and exceeded February's $-123.2 billion print.
• 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

From a technical perspective, the USD/MXN remains downwardly biased. Recently, the exotic pair failed to clear the 20-day Simple Moving Average (SMA) at 19.78, an indication that sellers are in charge in the near term. Buyers' momentum seems to be fading, as depicted by the Relative Strength Index (RSI), indicating that consolidation lies ahead.

If USD/MXN clears the current year-to-date (YTD) low of 19.43, this could pave the path toward the psychological 19.00 figure. On further weakness, the next floor would be the June 28 high-turned-support at 18.59.

Conversely, if USD/MXN climbs past 19.78, expect a test of the 200-day SMA at 19.98. A breach of the latter will expose the 20.00 mark.