Mexican Peso rallies as softer US inflation data weighs on US Dollar

• Mexican Peso recovers after two-day decline, buoyed by weaker-than-expected US CPI report.
• US CPI miss leads to cooling inflation, boosting prospects for Fed rate cuts.
• US Treasury yields drop, DXY falls 0.60% to 104.39, weakening Greenback.
• Minneapolis Fed's Kashkari questions monetary policy restrictiveness amid unexpected consumer spending levels.

The Mexican Peso erased two days of losses and rallies against the US Dollar on Wednesday after the latter continued to weaken due to a softer-than-expected US inflation report.

Consequently, expectations for a Federal Reserve (Fed) rate cut increased, exerting pressure on the American currency. At the time of writing, the USD/MXN trades at 16.65, dropping to four-week lows.

Mexico’s economic docket remains absent and will not resume until next week. Across the border, the US Bureau of Labor Statistics (BLS) revealed that the Consumer Price Index (CPI) was below estimates and the prior month’s data. Underlying inflation showed signs of cooling, which means that easing policy in the United States is back on the table.

US Treasury bond yields are plunging across the short and long end of the curve, a headwind for the Greenback. The US Dollar Index (DXY) fell 0.60% to 104.39.

In the meantime, Minneapolis Fed President Neel Kashkari hit the wires. He said that Americans have been spending “more than I would have expected,” adding that the big question is “how restrictive policy currently is”.

On Tuesday, Fed Chair Jerome Powell revealed that inflation is moving lower, though he added that he’s not as confident as he was before about inflation’s path to 2%. Powell noted that restrictive monetary policy could take longer than expected to do its work and bring inflation to the Fed’s goal.

Daily digest market movers: Mexican Peso surges on soft US CPI, disappointing Retail Sales

• On Monday, Bank of Mexico (Banxico) Governor Victoria Rodriguez Ceja made some dovish comments. She said the central bank could evaluate lowering rates as soon as the next meeting on June 27. She added that depending on the evolution of the inflationary outlook, the bank could slash the main reference rate that stands at 11.00%.
• Mexico’s economic docket will be absent during the current week. The next economic data release is expected to be Retail Sales on May 20, followed by the Gross Domestic Product (GDP), inflation figures and Banxico’s minutes on May 23.
• April's data show that Mexico’s headline inflation is reaccelerating. However, core prices are falling. This spurred Banxico’s revision to its inflation projections, with the bank expected to hit its 3% target toward the last quarter of 2025, later than March’s estimates for Q2 2025. Core inflation is projected to hit 3% in Q2 2025.
• The US Department of Labor showed that the CPI rose by 0.3% MoM in April, below estimates and March’s 0.4%. Core CPI rose by 0.3% MoM as expected but beneath the prior reading of 0.4%.
• Other data showed that Retail Sales missed estimates of 0.4% and came at 0% MoM, below March’s 0.6%. In the twelve months to April, Retail Sales grew by 3%, below the 3.8% increase of the previous reading.
• After the report, investors trimmed bets that the Fed may cut rates faster than expected, though the odds for a September cut have lately adjusted to 97%, higher than Tuesday’s 83%.
• The deterioration in consumer sentiment, alongside a cooling labor market, has opened the door for investors to price in rate cuts by the Fed. This is because US central bank policymakers acknowledged that risks to achieving its dual mandate on employment and inflation “moved toward better balance over the past year.”

Technical analysis: Mexican Peso counterattacks as USD/MXN plummets below 16.70

Following worse-than-expected US data, the USD/MXN extended its losses past the 16.70 figure. Momentum is on the side of the Mexican currency as the exotic pair has dropped to new four-week lows, poised to test the next support level seen at the 2023 low of 16.62, followed by the current year-to-date low of 16.25.

On the flip side, buyers must reclaim the 50-day SMA at 16.78, which could exacerbate a rally toward the 100-day Simple Moving Average (SMA) at 16.92. Once cleared, the next supply zone would be the 17.00 psychological level. In that event, the next stop would be the 200-day SMA at 17.17.