Mexican Peso continues to strengthen as Banxico holds rates on high inflation

• Mexican Peso edges up against US Dollar for second consecutive day.
• Banxico’s decision to maintain the interest rate at 11.00%, sponsored the latest leg down on USD/MXN.
• Bank of Mexico cited higher prices as reason to pause lowering rates.
• US consumers become pessimistic on economy due to inflation, unemployment, interest rates.

The Mexican Peso extended its gains for the second straight day after the Bank of Mexico (Banxico) decided to keep rates at 11.00% due to a reacceleration of inflation. In the meantime, the University of Michigan (UoM) Consumer Sentiment deteriorated in May, weighing on the performance of the Greenback versus the Mexican currency. The USD/MXN trades at 16.77, down 0.01%

On Thursday, Banxico’s Governing Council decided to keep rates unchanged, citing the latest uptick in inflation. The bank said that even though the disinflation process is expected to continue, the central bank revised its inflation projection.

In its policy statement, Banxico noted, "Considering that inflationary shocks are foreseen to take longer to dissipate, the forecasts for headline and core inflation have been revised upwards for the next six quarters. In particular, services inflation is foreseen to show more persistence, as compared to what had been previously anticipated.”

The US economic docket revealed that American consumers became less optimistic about the economy. The University of Michigan survey said they’re concerned about inflation, unemployment and interest rates.

Recently, two Federal Reserve (Fed) officials made statements that have drawn attention. Fed Governor Michelle Bowman emphasized that the US central bank should act "carefully and deliberately" in its policy decisions. Meanwhile, her colleague, Lorie Logan of the Dallas Fed, expressed that it is too early to consider cutting interest rates.

Next week, the US docket will feature the release of inflation figures, retail sales, building permits and Fed speeches.

Daily digest market movers: Mexico’s high inflation prompted Banxico to hold rates flat

• Banxico unanimously decided to keep rates at 11.00% due to recent data signaling that inflation is accelerating.
• The central bank revised its estimates that inflation would converge toward its 3% goal until the last quarter of 2025, later than March’s estimates for Q2 2025. Core inflation is projected to hit 3% in Q2 2025.
• April's data show that Mexico’s headline inflation is reaccelerating. However, core prices are falling.
• The UoM Consumer Sentiment Index retreated in May from 77.2 in April to 67.4, missing analysts’ estimates of 76. According to Joanne Hsu, Director of the UoM Survey, the 10-point decline “is statistically significant and brings sentiment to its lowest reading in about six months.”
• Inflation expectations for one year rose from 3.2% to 3.5% in May. For a 10-year period, they increased to 3.1%, a tenth up from 3.0%.
• US labor market continues to cool. April’s Nonfarm Payrolls and the release of the latest unemployment claims data can put pressure on Fed officials, who acknowledged that risks to achieving its dual mandate on employment and inflation “moved toward better balance over the past year.”
• Data from the futures market show odds for a quarter-percentage-point Fed rate cut in September at 74% versus 85% ahead of the UoM Consumer Sentiment report.

Technical analysis: Mexican Peso gains traction as USD/MXN tumbles below 16.80

The USD/MXN downtrend remains intact as the Peso’s strength drives the pair lower. Momentum favors sellers as the Relative Strength Index (RSI) remains in bearish territory, suggesting that lower prices are expected.

If the USD/MXN remains below the 50-day Simple Moving Average (SMA) of 16.79, that could pave the way for additional losses. The next support will be the 2023 low of 16.62, followed by the current year-to-date low of 16.25.

On the other hand, if buyers claim the 100-day SMA at 16.92, that could sponsor a leg up to the 17.00 psychological level. A breach of the latter would expose the 200-day SMA at 17.17, followed by the January 23 swing high of 17.38 and the year-to-date high of 17.92.