Mexican Peso gains ground as US Dollar dives
- Mexican Peso climbs, but the Fed-Banxico rate gap threatens its appreciation.
- US Producer Prices rise, delaying Fed rate-cut expectations to September.
- USD/MXN dips as US Dollar Index slides 0.55%, but policy divergence looms.
The Mexican Peso (MXN) gained modestly against the US Dollar (USD) on Thursday as further inflation data shows that prices in the United States (US) remain above the Federal Reserve’s (Fed) 2% target. Additionally, expectations about US President Donald Trump's signing of a reciprocal tariffs executive order late in the day have boosted the Greenback, trimming some losses against the emerging market currency. USD/MXN trades at 20.50, down 0.04%.
The latest round of US inflation data showed that prices paid by producers rose in January after the release of the Consumer Price Index (CPI) a day ago. Meanwhile, expectations that the Federal Reserve would cut rates lie at 35 basis points (bps), with traders delaying the first cut to September from June.
In the meantime, the US Bureau of Labor Statistics (BLS) showed that the labor market remains strong—the number of Americans filing for unemployment benefits diminished during the week ending February 8.
Despite this, the USD/MXN pair extended its losses due to the relief that US President Trump could sign reciprocal tariffs near 18:00 GMT, though they’re not expected to become effective until April 1.
Another reason for the sudden USD/MXN downside is that the buck is tumbling over 0.55%, as depicted by the US Dollar Index (DXY), down from 107.91 to 107.37.
Nevertheless, traders should be aware of the monetary policy divergence between Banco de Mexico (Banxico) and the Fed, which suggests that the interest rate differential would reduce substantially, favoring the latter. Therefore, USD/MXN could resume its uptrend in the near term.
Daily digest market movers: Mexican Peso advances as the Greenback gets battered
- Mexico’s economic docket remains absent, yet deterioration in the automobile industry and worse-than-expected Industrial Production figures hint the economy is in worse shape than expected.
- This and US President Donald Trump's trade rhetoric on Mexico would be headwinds for the Mexican currency.
- The US Producer Price Index (PPI) in January came at 0.4% MoM, exceeding forecasts of 0.3%, down from 0.5%. In the twelve months to the last month, PPI rose 3.5% above estimates and up from the 3.3 print in December.
- The Core PPI increased 0.3% MoM as expected and was up by 3.6% YoY, above estimates of 3.3%.
- Initial Jobless Claims for the week ending February 8 rose by 213K, below estimates of 215K, and the February 1 reading of 220K.
- The Fed adopted a cautious stance following the red-hot CPI and PPI January readings. As the disinflation process deteriorated, officials turned slightly neutral led by Fed Chair Powell who said on Wednesday “We are close but not there on inflation,” adding, “We want to keep policy restrictive for now.”
- Trade disputes between the US and Mexico remain in the boiler room. Although the countries found common ground previously, USD/MXN traders should know that there is a 30-day pause and that tensions could arise toward the end of February.
USD/MXN technical outlook: Mexican Peso holds firm near 20.50
The USD/XN pair consolidates near the 50-day Simple Moving Average (SMA) at around 20.50, with no clear bias during the last seven days. The distance between the 50 and 100-day SMAs has reduced sharply, indicating the bullish trend that began in April 2024 is losing steam after peaking at a multi-year high at 21.29.
If buyers want to regain control, they must clear key resistance levels like the January 17 high at 20.90, the 21.00 figure, and the year-to-date (YTD) at 21.29. Conversely, if USD/MXN drops below the 50-day SMA and clears the 100-day SMA at 20.23, it paves the way for challenging the 20.00 mark. On further weakness, key support levels are eyed at 19.50 and the 200-day SMA at 19.33.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
