USD/MXN Price Annual Forecast: Economic slowdown, monetary policy, Trump to influence the Peso in 2025

• Mexican Peso to be driven in 2025 by monetary policy divergence between Banxico and the Fed.
• Mexico’s economic slowdown and dynamism in the US will boost the Greenback.
• The USD/MXN is to be underpinned by Trump's trade policies amid the reacceleration of inflation.

In 2024, the Mexican Peso (MXN) enjoyed a wild ride, initially gaining some steam. However, several factors were headwinds for the Mexican currency, such as general elections in Mexico and the United States (US), the ongoing economic slowdown, monetary policy, geopolitics, and the end of the carry trade. The Peso is foreseen to remain “volatile” in 2025, beginning with the inauguration of the current US President-elect Donald Trump, and protectionism policies that, if implemented, could spark a reacceleration of global inflation.

The calm before the storm

The Mexican Peso began the first quarter of 2024 on the front foot, appreciating modestly due to the carry trade. The interest rate differential between Mexico and the US, with over 575 basis points (bps), benefitted the former. However, Banco de Mexico (Banxico) began its easing cycle on March 21, reducing rates by 25 bps.

Although Banxico’s decision was expected to weaken the Peso as it shrank the interest rate differential, it didn’t. However, tensions in the Middle East were about to rise, spurring the first spike in the exchange rate.

 

Banxico Interbank Lending Rate - Source: FXStreet

Mexican Peso depreciates sharply as the Middle East conflict escalated

On April 9, the USD/MXN was trading at around eight-year lows of 16.25, but Iran and Israel exchanged attacks between April 13 and 19 and sparked a flight to safe-haven assets.

Consequently, the Greenback rose to the detriment of the Mexican Peso as news headlines crossed the wires, and the USD/MXN soared from around multi-year lows to 18.15 on April 19 during the Asian session. In that seven-days span, the Mexican currency depreciated by over 10%.

Banxico cuts again and politics take center stage

The second quarter featured Banxico’s second interest rate cut on May 9 in a 3-2 split vote, with Deputy Governors Heath and Espinosa dissenting to cut rates 25 bps from 11.00% to 10.75%.

In June, President Claudia Sheinbaum Pardo of the ruling party Morena became the first female President in the country’s largest election. Once the results were known, the USD/MXN traded volatile, with the Peso depreciating over 4% on June 3, amid fears that Morena and its coalition would secure the majority in Congress as they seek to change the Constitution.

Investors ditch the MXN as Congress approves reforms; the Fed turns dovish

The third quarter was challenging for the Mexican currency, which began to be sold by traders after former President Andres Manuel Lopez Obrador presented bills for the upcoming Congress. One proposal was to reform the judicial system, and the second was to dissolve autonomous bodies created to level the playing field between the government and private companies.

Since the judicial reform was approved in September, the Mexican Peso extended its landslide, as the USD/MXN rose from around 18.99 to 20.22, hitting a yearly high then.

In the US, Federal Reserve Chairman Jerome Powell said in Jackson Hole that it was time to begin lowering interest rates as the risk of inflation was tilted to the downside. At that time, the labor market seemed to weaken further, with risks of the unemployment rate skewed to the upside.

Fed Funds Rate – Source: FXStreet

US Unemployment Rate – Source: FXStreet

Sheinbaum takes office, Trump wins the US election, and Fed eases policy

As the year agonized, the Mexican Peso lost steam after Claudia Sheinbaum began her six-year term in October and Donald Trump won the US general election.

Following that, US President-elect Trump began his harsh rhetoric against Mexico, threatening to impose tariffs on Mexican imports to the US if the country didn’t agree to fight drug cartels and stop illegal immigration.

In response to Trump, Mexican President Claudia Sheinbaum said, “One [US] tariff will be followed by another [from Mexico], and so on until we put common enterprises at risk.” She added, “The main victims will be US consumers” who buy manufactured cars from Mexico.

On the monetary policy front, the Federal Reserve cut rates by 100 basis points in the second half of 2024, leaving the fed funds rate at the 4.25% - 4.50% range, while Banxico slashed borrowing costs by an additional 75 bps of cuts, which added to the already 50 bps cut earlier, left the main interbank lending rate at 10.00%.

What’s next for the Mexican Peso in 2025?

The Peso would be influenced by economic growth, monetary policy, inflation, and, you’ve guessed it, US President-elect Donald Trump. If Mexican President Claudia Sheinbaum reaches agreements in the Trump’s agenda, that could remove one factor and leave market players focused on economic themes.

Divergence in growth: Mexico’s is expected to grow less than the US

Mexico’s economy is expected to underperform compared to the past two years. However, the services sector continues to outperform manufacturing, supported by subsequent government increases in minimum wages. Growth will be sluggish due to its fiscal consolidation plan, which was considered in the 2025 budget, and Banxico's still higher interest rates.

Banxico’s private economists survey showed that analysts estimate the economy will slow further compared to 2023 and 2024, with growth estimated at 1.17% for 2025, below the 1.55% of 2024.

In the US, the Summary of Economic Projections (SEP) revealed in the last Federal Reserve monetary policy showed that policymakers estimate the US economy will grow 2.5% in 2024 and would hit 2.1%,

GDP comparison US and Mexico – Source: Tradingeconomics

Inflationary pressures build in the US, not so in Mexico

Mexico’s disinflation process has evolved substantially during the year. November’s Core Consumer Price Index (CPI) dropped three tents to 3.58%. Even though it remains above Banxico’s target, the central bank remains confident it will reach the 3% goal by the last quarter of 2025 or early 2026, as revealed in December’s meeting monetary policy statement.

In the US, the story is different. Inflation has reaccelerated during the last five months after the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, hit its yearly bottom of 2.63% in June 2024. Prices had risen to 2.8% in November, indicating that monetary policy could not be as restrictive as many Fed officials thought.

Alongside that, the upcoming White House administration's threats of imposing tariffs, deregulation, and tax cuts could deteriorate the US inflationary scenario.

US Core PCE – Source: FXStreet

Will the Fed pause as Banxico extends its easing cycle?

Given the backdrop, monetary policy is expected to diverge in 2025. Banxico is expected to continue its loosening cycle in 2025, with estimates that the primary reference rate would be lowered from 10.00% to 8.00%, according to Banxico’s private survey. This implies a reduction of 0.25% in each of the eight monetary policy meetings at the interbank lending rate.

Additionally, the Mexican institution opened the door to large-scale rate cuts after tweaking its policy statement, adding, “In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.”

Federal Reserve officials adopted a more cautious stance as data suggested that the economy “is in a very good place,” paraphrasing words from Fed Chair Jerome Powell. Even though the board agrees that easing policy is needed, they acknowledged the pace should be reduced.

The Fed’s December projections suggested that policymakers consider 50 bps of easing, down from the 100 bps foresaw in September.

Overall, the interest rate differential between Mexico and the US could be reduced from 550 bps to 400 bps in the upcoming year. Therefore, further USD/MXN upside is seen.

Trump’s tariffs and taxes to underpin the USD/MXN

The Mexican Peso is already facing the challenges of a Donald Trump presidency, even though he hasn’t taken office until January 20, 2025. His victory keeps the financial markets on their toes as some of his policies tend to be protectionist, focused on domestic issues.

Trump has threatened to impose tariffs, even saying it's his favorite word. So far, he signaled that he will impose tariffs on imports from Mexico if the country fails to improve fighting drug cartels and stop illegal immigration.

This could lead to Mexico’s retaliatory actions. Nevertheless, Trump believes that imposing tariffs would benefit the US, although most trading partners warned that the costs would be passed on to customers.

If Congress approves tariffs or through Presidential Executive Orders, they could exert upward inflation pressures and trigger another round of higher prices, preventing the Fed from easing policy.

USD/MXN Technical Analysis: To consolidate awaiting a catalyst

The USD/MXN is upward biased, as the monthly chart depicts, yet it shows signs of consolidation as buyers lose steam after reaching a ‘double bottom’ profit target objective at 20.34. The exotic pair cleared the latter and hit a year-to-date (YTD) high of 20.83 before retreating to the current exchange rate.

Suppose the pair finishes the year confined within the 19.76-20.83 range. In that case, that will confirm the formation of a ‘bearish harami’ candle chart pattern, which has bearish implications and opens the door for further downside.

The Relative Strength Index (RSI) shows buyers are losing steam, indicating that consolidation lies ahead.

In that outcome, sellers would have the upper hand. The USD/MXN first support is seen at the 100-month Simple Moving Average (SMA) of 19.47. A breach of the latter will expose the 50-month SMA at 19.18, followed by the psychological 19.00 figure. On further weakness, bears could drive the exchange rate toward the previous ‘double bottom’ neckline at 18.50.

On the other hand, if buyers hold USD/MXN above 20.00 and push the exchange rate above 20.50, this could open the door for gains. The first resistance would be the 2024 peak at 20.83, followed by the 21.00 mark. Once cleared, key resistance levels emerge at the March 2022 peak at 21.46, followed by the 22.00 figure ahead of the November 2021 high at 22.15

Conclusion

The Mexican Peso faces a confluence of challenges heading into 2025, ranging from domestic political shifts to international geopolitical dramas.

The currency's trajectory will likely be heavily influenced by the interplay between Mexico's monetary policy and its economic growth relative to the US. This would usually favor further USD/MXN upside, as the interest rate differential would reduce.

Additionally, the Greenback would strengthen if the incoming US administration under Donald Trump introduced fiscal expansionary policies and imposed tariffs, as they are inflationary prone. On the other hand, geopolitical risks looming in the Middle East and the Russia-Ukraine conflict loom, favoring a flight to safe-haven assets, implying USD upside and MXN downside.