Mexican Peso strengthens on inflation spike, post US-UK trade deal

• Mexico's inflation accelerates in April, but Banxico's Heath signals easing path to continue.
• USD/MXN pressured by improved risk sentiment after US-UK trade deal lifts EM currencies.
• Despite strong US jobless claims data, US Dollar remains muted ahead of Friday's Fed commentary.

The Mexican Peso advanced on Thursday against the Greenback as prices in Mexico accelerated near the top of Banco de Mexico's (Banxico) inflation tolerance range. Additionally, an improvement in risk appetite due to the US/UK trade deal increased Peso's appeal. At the time of writing, the USD/MXN trades at 19.55, down 0.15%.

Inflation in Mexico accelerated in April, as revealed by the Instituto Nacional de Estadística, Geografía e Informática (INEGI). Although this suggested caution by Banxico, its Deputy Governor, Jonathan Heath, said that it is highly probable the central bank will continue to lower its interest rates, even though inflation risks are skewed to the upside.

Heath added that in the second half of 2025, the decision would be taken with more caution, adding that there is room for easing policy. In the meantime, market participants seem confident that Banxico will cut rates by 50 basis points at the May 15 meeting.

In the US, President Donald Trump announced a trade deal with the UK, which market participants perceived as positive news, and supported the emerging market (EM) currency. Wall Street extended its gains on Thursday, ahead of a busy schedule for Fed officials on Friday, which are expected to grab headlines amid an absent economic docket.

Data-wise, the number of Americans filling for unemployment benefits was lower than expected, indicating a robust labor market. Despite this, the USD/MXN failed to gain traction, remaining muted during the day and confined to the 19.50-19.61 range.

Daily digest market movers: Mexican Peso holds firm as sentiment improves

• Following the Fed's decision, data from the Chicago Board of Trade (CBOT) suggests that traders are pricing 67 bps of easing toward the end of 2025.
• Mexico's April CPI rose by 3.93% YoY, above the 3.90% forecast and up from 3.80% compared to last year's range. Core CPI increased by 3.93%, up from 3.64%, exceeding estimates of 3.92%.
• The Citi Mexico Expectations Survey indicates that most analysts expect Banxico to cut rates by 50 bps at the May 15 meeting.
• The US Initial Jobless Claims for the week ending May 3 came in at 228K, slightly below the expected 230K and an improvement from the prior week's 241K, according to the Department of Labor. The data signals a modest rebound in labor market stability.
• Although Mexico's economy narrowly avoided a technical recession, tariffs imposed on Mexican products, a reduced budget, and geopolitical uncertainties will continue to strain the country's finances and impact the Peso.

USD/MXN technical outlook: Mexican Peso loses steam as USD/MXN consolidates

The USD/MXN is bearishly biased, though sellers had failed to drag the exchange rate past the current year-to-date (YTD) low of 19.46. This suggests bears' lack of strength, clearing the path for a recovery.

Momentum remains bearish, yet the Relative Strength Index (RSI) flattish slope confirms consolidation ahead.

If USD/MXN drops below 19.46, the next support would be the 19.00 psychological figure. 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.