Insights 
VT 
Federal Reserve Caution
The Federal Reserve remains cautious amid economic signals and supply-side uncertainties, as reflected in April data. A decline in the Producer Price Index and minimal retail growth suggests slowing demand, prompting Federal Reserve Chair Powell to highlight the unpredictable economic landscape.
Banxico cuts its rate by 50 basis points to 8.5%, indicating more potential cuts. Trade tensions pose a threat to Mexico’s economy, heavily reliant on US trade, potentially affecting growth. The US imposed tariffs on certain Mexican imports, prompting Mexico’s Economy Minister to seek an early review of USMCA agreements.
The US experienced a 0.3% economic contraction in Q1, the first since 2022, due to increased imports before new tariffs. USD/MXN faces downward pressure, trading near 19.50, confined within a consolidation range, indicating further potential losses. A break below 19.11 could lead to deeper declines for the peso.
Market Action Dynamics
We have been observing the US dollar strengthen against the Mexican peso, and the reasons are becoming clearer by the day. After Banxico reduced its benchmark rate by half a percentage point to 8.5%, the resulting lower yield on Mexican assets triggered further selling pressure. That downward move in rates pointed to more easing on the horizon, which has spurred concerns around capital outflow.
Ortíz’s decision at the central bank follows growing economic fragility both domestically and abroad. At the same time, Powell’s side of the story appears to be creating different outcomes. With US inflation expectations shooting up — particularly the one-year forecast that now sits at 7.3% — there’s more reason to believe that rate cuts by the Fed are not arriving as soon as markets might have assumed earlier this year. That’s recalibrated the dollar’s attractiveness.
What’s more, data from April in the United States paints a mixed picture. Slower retail growth, alongside falling producer price figures, indicates demand may be softening, but inflation pressures remain elevated. Fed officials, confronted by this uncertainty, are moving with added caution. The minutes and comments from past weeks confirm that position: there’s a high threshold for further rate adjustments right now.
On the other hand, international trade matters are also feeding into the price action. The US opted to impose new tariffs on a subset of goods coming from Mexico. That hasn’t gone unnoticed. Buenrostro immediately responded by calling for a faster reassessment of treaty terms under USMCA, particularly with the aim of shielding domestic output and smoothing over ongoing frictions.
Now, if we shift back to the data, the US economy unexpectedly contracted by 0.3% during the first quarter — the first decline since 2022 — largely due to a pre-emptive surge in imports ahead of the tariff implementation. That coincided with a strengthening dollar, which tends to generate downward pressure on Emerging Market currencies, the peso included.
From a market action standpoint, the USD/MXN exchange rate continues to hold within a narrow band just above 19.50. This kind of consolidation isn’t unusual amid such conflicting narrative signals. However, we’re keeping an eye on the 19.11 level, as a move below that could open up the path to increased downside risk for the peso. With current price action hovering near the higher end of the range, trading desks may start to build directional exposure depending on incoming data and further central bank pronouncements.
In timing terms, the coming weeks will bring forward more releases from the US: CPI, jobless claims, and revised GDP figures are all on the radar. And each of these updates holds the potential to firm up the dollar, especially if inflation or employment strength persist. From our vantage point, this puts ongoing pressure on pairs like USD/MXN, where relative monetary policy remains in flux.
Rates traders will have to adjust positioning depending on updated forward guidance, but with volatility still relatively restrained, opportunities may emerge through calendar spreads or delta hedges. Premia levels may start to shift as we approach the next Banxico meeting, especially with expectations that Ortíz might continue easing policy, should domestic metrics like inflation and retail sales justify such moves.
We’ll be watching closely for any remarks from officials on either side that clarify or muddy rate expectations. Testy US-Mexico relations are another factor that might produce unexpected currency swings, especially if USMCA renegotiations encounter resistance. Until there’s more clarity, it may be advisable to weigh downside protection strategies more than aggressive directional bets.
