USD/MXN falls as Mexican Peso gains momentum on mixed US CPI

• USD/MXN reached a daily low shy of cracking 18.00 as a reaction to US CPI data.
• Sentiment shifted mixed as US core CPI was unchanged, cementing the case for a Fed rate hike in May.
• Federal Reserve officials remain committed to tackling inflation, even though it causes a recession.

The Mexican Peso (MXN) continued to strengthen against the US Dollar (USD), following contradictory US inflation data, which cemented the case for another rate hike by the US Federal Reserve (Fed) at the upcoming May meeting. The USD/MXN is trading at around 18.08, below its opening price by a half percent.

Inflation in the United States dropped, except for core CPI

US equities are fluctuating following an important March inflation report. The Consumer Price Index (CPI) rose 5% YoY, below estimates of 5.3% and lower than February’s 6%, showing that Fed’s tightening is indeed working. Nonetheless, excluding volatile items like food and energy, the so-called core CPI rose 5.6% YoY, unchanged compared to the consensus and the prior’s month data.

Given that core CPI remains stickier than expected, the Federal Reserve (Fed) is expected to raise rates by 25 bps at the May meeting. The CME FedWatch Tool shows odds for a 25 bps hike at 66.5%, below Tuesday’s 72.9%.

The USD/MXN edged lower as an initial reaction to the headline, with the USD/MXN pair reaching a new weekly low of 18.0187, before rebounding and stabilizing around current exchange rates. The greenback weakened, as shown by the US Dollar Index (DXY), down 0.59%, at 101.535, weighed by falling US bond yields.

At a certain point, the US 2-year bond yield dropped 14 bps, but so far has erased some of those losses and is back above 4%, down 2 bps.

Meanwhile, Federal Reserve officials posted mixed comments, led by Minnesota’s Fed Neil Kashkari, who commented on Wednesday that tighter monetary conditions and difficult credit conditions could have caused the Silicon Valley Bank (SVB) crisis. But he emphasized, “We need to get inflation down. ... If we were to fail to do that, then your job prospects would be really hard.”

Later the Richmond Fed President Thomas Barkin said that the US inflation report was as expected but added that although inflation has peaked, “there is still some way to go.” Furthermore, he said that before the May meeting, the PCE and the ECI would be crucial to assess his stance at the upcoming meeting.

At around 18:00 GMT, the Federal Reserve Open Market Committee (FOMC) will reveal its latest monetary policy meeting minutes. The minutes are expected to show discussions of the latest meeting after the defaults of Silicon Valley Bank and Signature Bank.

USD/MXN Technical Analysis

The USD/MXN is downward biased, though facing solid support. For a bearish continuation, the USD/MXN pair needs to crack 18.00, to pave the way for a re-test of the YTD low at 17.8968. Otherwise, the emerging market currency could weaken, exposing the 20-day EMA at 18.2533, which USD/MXN buyers would test. Break above, and the USD/MXN could rally to the 50-day EMA at 18.4526.