USD/MXN seesaws as sentiment fluctuated: while US and Mexican central bank divergence could weigh on the MXN

After bottoming around the 17.9000 area in the last week, the USD/MXN pierced the 18.00 area before retracing and turning negative on Monday. That after the latest round of mixed US economic data and Mexican inflation slowing in the first half of April suggested that central bank divergence could weigh on the MXN.

Last Friday, the US Federal Reserve Governor, Lisa Cook, expressed that monetary policy is entering an uncertain phase and suggested that headwinds from the banking sector could impact the outlook for rising interest rates. She also anticipates a deceleration in March PCE inflation, though she added that core inflation remains sticky.

The agenda of US economic releases featured the March Chicago Fed National Activity Index (CFNAI), with figures plummeting to -0.19, above estimates of -20, unchanged from February’s reading. Despite the previously mentioned, the three-month moving average ticked up to 0.01%, signaling that the US economy continues to grow slower.

Of late, the Dallas Fed Manufacturing Business Index in April plummeted to -23.4, well below the -11.00 estimated, as the survey showed that perceptions of broader business conditions worsened, according to the poll.

On the Mexican front, annual headline inflation rose 6.24% through mid-April, its lowest level since October 2021. Core inflation stood at 7.75% for the same period. Even though the Bank of Mexico’s (Banxico) target is 3%, expectations that the central bank completed its tightening cycle have arisen.

Aside from this, investors’ odds that the Federal Reserve will hike rates by 25 bps are at 90%, according to the CME FedWatch Tool. However, traders estimate that the US central bank “could” cut rates by the September meeting, followed by another one in December.