Insights 
VT 
The Mexican Peso holds steady against the US Dollar despite proposed US tariffs on the EU. USD/MXN remains below the 19.30 mark, amid economic updates from Mexico and the US.
US recession worries rise with Trump’s proposed 50% tariff on EU imports. Mexico’s April trade balance showed an $88 million deficit, better than the predicted $160 million. This is a reversal from March’s $3.442 billion surplus, as reported by INEGI.
Trump’s Tariff Proposal
Trump proposes a 50% tariff on EU imports, effective June 1st, citing challenges in negotiations. Recent US developments include Trump’s tax bill and a downgrade in Moody’s credit rating, impacting the Dollar’s strength.
Concerns rise over potential global economic impacts from tariffs on the EU and Apple. Trump’s tax bill could increase the US deficit by $3.8 trillion from 2026-2034, according to the Congressional Budget Office.
Moody’s downgrade and Trump’s tax policy further burden the US Dollar. The CME FedWatch tool shows a 94.7% chance rates stay at 4.25%-4.50% in June, with no change expected until September.
Mexico’s inflation and GDP data meet expectations, alleviating pressure on Banxico for further rate cuts. USD/MXN remains below 19.30, indicating a potential downtrend with RSI at 38.92.
The Impact of the Federal Reserve
The US Dollar, used worldwide in transactions, is heavily traded, accounting for 88% of global forex turnover. Monetary policy by the Federal Reserve is a major factor in its value.
The Federal Reserve adjusts interest rates to control inflation and employment, influencing the Dollar’s strength. Quantitative easing and tightening processes impact its value under varying economic conditions.
The current hold of the Peso just beneath the 19.30 threshold signals resilience in the face of international tensions. Despite external risks, including fresh tariff threats out of the United States, we’ve not yet observed a decisive move higher in USD/MXN, which might have typically followed under such external stress. With the latest Mexican trade data outperforming expectations—albeit still reflecting a deficit—it suggests underlying economic conditions that aren’t quite as weak as many anticipated.
April’s narrower deficit, compared to March’s substantial surplus, introduces a notion of fading export strength or shifting demand dynamics. For those watching flows, this month-over-month swing, while not dire, changes how we’d evaluate momentum in the Peso, particularly if followed by weaker trade data in coming months. A widening trade deficit often hints at pressure on the currency down the line unless offset by investment inflows or other sources of foreign exchange earnings.
Meanwhile, over in the United States, the proposed tariffs and fiscal stances from Washington bring their own implications. A 50% tariff on EU goods, effective from early June, moves beyond routine trade posturing. If implemented, this measure not only challenges transatlantic trade flows but also escalates tensions that can filter down into inflation metrics and consumption behaviour. Traders gauging US macroeconomic risk will be attuned to the likely retaliation or knock-on shifts in global supply chains—which historically has created noise in safe-haven flows.
We see bleak projections surrounding fiscal policy begin to take shape, too. The anticipated $3.8 trillion bump in US deficits over the next decade, brought on by potential tax code changes, weighs heavily when paired with slower growth and credit downgrades like the one from Moody’s. These factors tend to erode confidence in fixed-income stability tied to the US—especially if rating agencies continue to downgrade expectations.
No surprise then that the Federal Reserve remains in holding mode. The CME’s implied probability of unchanged rates through the summer underscores how policymakers see risks on both sides—growth and inflation—and are prepared to wait. While markets often crave direction, this kind of pause invites volatility as expectations swing with each new data point. The Dollar, being tethered so heavily to rate expectations, sits within a narrow band, yet the underlying stressors—like tariffs and fiscal imbalances—could skew it quickly if perceptions deteriorate.
In Mexico, stable inflation matched by consistent growth data reduces the immediate case for any further easing from Banxico. That, in turn, maintains support for the Peso even in the absence of aggressive tightening—securing carry advantage in the backdrop of policy divergence with the Fed. We hope that remains intact, but softer growth or inflation recovery might reignite easing expectations.
On technical grounds, the 19.30 level functions as a barrier for upward Dollar moves. RSI, currently at 38.92, remains below the neutral 50 line, implying an undertone of bearish sentiment for the pair. While that doesn’t guarantee a swift reversal, it marks a notable shift from the more robust USD/MXN positioning seen earlier in the year.
As always, what the Federal Reserve does—or doesn’t do—moves entire pricing structures. The Fed’s balance sheet methods—whether through asset purchase programs or eventual roll-offs—alter liquidity flows. Such mechanisms, while dull on the surface, transmit through cross-border capital flows and can stir carry trade decisions embedded in foreign exchange demand.
So, with tariff announcements arriving alongside interest rate inertia and fiscal concerns swirling in the background, it becomes clearer that short-term positioning isn’t a one-way bet. Plenty of moving parts—some slow-burning like deficit growth, others sharper like trade policies—will keep the Dollar and Peso dynamic volatile in the short term. Those closely monitoring spreads, forward rates, or even interbank liquidity should be alert to how these variables cascade into one another across time.
