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Mexican Peso Falls on Risk Aversion and Trade Jitters Ahead of FOMC Meeting
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Fed Rate Decision Takes Center Stage as U.S.-Mexico Tensions Escalate
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USD/MXN Breaks Trendline, Eyes Resistance Level at 19.80
Risk-Off Sentiment Pressures Mexican Peso and Emerging Market Currencies
The Mexican Peso (MXN) continued to weaken against the U.S. Dollar (USD) on Tuesday, extending its recent slide as global markets adopt a cautious stance ahead of the Federal Reserve’s monetary policy announcement on Wednesday.
At the time of writing, USD/MXN is trading around 19.764, marking a 0.34% gain from Monday’s levels.
The Peso's decline reflects growing risk aversion, driven by shifting expectations around the Fed’s rate path. Stronger-than-expected U.S. economic data has tempered hopes for imminent rate cuts, prompting investors to rotate into the U.S. Dollar at the expense of risk-sensitive currencies like the MXN and other emerging market (EM) peers.
Dollar Gains Ground as Markets Reassess Fed Outlook
USD/MXN’s latest climb has been fueled by mixed economic data out of the U.S., particularly in the services sector. The Institute for Supply Management (ISM) Services PMI surprised to the upside, rising to 51.6 in April—beating the 50.4 forecast and the previous 50.8 reading—signaling continued resilience in service-driven business activity.
Conversely, the S&P Global U.S. Services PMI fell to 50.8, missing the projected 51.4 and posting its weakest growth rate in two years. The divergence suggests a patchy recovery, with larger, domestically focused firms outperforming smaller, globally exposed counterparts.
Markets reacted more strongly to the ISM release, which pushed U.S. Treasury yields slightly higher and reinforced expectations of a more cautious Fed. Rising yields tend to boost the appeal of the U.S. Dollar, putting additional pressure on currencies like the Peso.
U.S.-Mexico Tensions Simmer in the Background
Adding to the cautious mood are lingering political tensions between Mexico and the U.S. Over the weekend, Mexican President Claudia Sheinbaum firmly rejected former U.S. President Donald Trump’s proposal to send American troops to combat drug cartels within Mexican territory. Sheinbaum emphasized Mexico’s sovereignty, stating, “We can work together, but you in your territory and us in ours.”
While the diplomatic exchange has sparked headlines, investors have largely viewed it as a secondary concern with minimal immediate impact on USD/MXN trading.
Daily Digest: Central Bank Divergence in Focus Ahead of Fed Decision
- All eyes are on the Federal Reserve as the Federal Open Market Committee (FOMC) is widely expected to hold interest rates steady in the 4.25%–4.50% range on Wednesday. However, markets will be closely watching Chair Jerome Powell’s press conference for any clues on the timing of potential rate cuts.
- According to the CME FedWatch Tool, traders are currently pricing in a 25 basis-point (bps) rate cut by July, although expectations have tempered slightly after Monday’s stronger-than-expected ISM services data. A dovish signal from Powell could weigh on the U.S. Dollar and offer support to the Mexican Peso.
- Meanwhile, the Bank of Mexico (Banxico) is expected to deliver a 50 bps rate cut at its upcoming May 15 meeting. First-quarter GDP rose just 0.2%, narrowly avoiding recession, while inflation continues to trend lower. Banxico remains cautious and data-dependent in its approach.
- Trade tensions also continue to cloud the outlook. Recent U.S. tariffs on key Mexican exports—such as metals and automobiles—have strained the external sector and weighed on trade and investment prospects. Broader uncertainty around global demand, commodity prices, and future U.S. trade or immigration policy further complicates the outlook for Emerging Market (EM) currencies like the Peso.
USD/MXN Approaches Key Technical Resistance
From a technical standpoint, USD/MXN has broken above a descending trendline drawn from the April high of 21.08, signaling a possible shift in short-term momentum.
The pair is currently trading above the 14.14% Fibonacci retracement level of the April downtrend, which offers near-term support at 19.698. With prices at their highest in nearly two weeks, the 10-day Simple Moving Average (SMA), now at 19.611, serves as an additional support level.
Momentum indicators are improving, with the Relative Strength Index (RSI) nearing the neutral 50 mark—suggesting bearish momentum is easing. Resistance lies ahead at the psychological 19.80 level, followed by the 23.6% Fibonacci retracement at 19.85.
On the downside, the reclaimed trendline and the 19.59–19.60 zone provide initial support, while stronger support sits at the April low of 19.47.
USD/MXN daily chart
