The Mexican Peso (MXN) has trimmed its losses and stabilized against the US Dollar despite escalating trade tensions between the United States and Mexico. The currency initially weakened after US President Donald Trump reaffirmed that tariffs on Mexican imports would proceed as scheduled. However, cautious optimism surrounding ongoing trade negotiations and potential breakthroughs has helped the Peso recover.
US-Mexico Trade Talks: A Crucial Turning Point
Late Monday, President Trump confirmed that tariffs on Mexico were still on course, increasing pressure on the Peso. Despite this, Mexican President Claudia Sheinbaum expressed optimism, noting that negotiations with the US could yield positive results by Friday. A potential resolution could provide relief for the Mexican currency, although underlying monetary policy divergences between the US and Mexico remain a concern.
Banxico’s Dovish Outlook Weighs on the Peso
The Bank of Mexico (Banxico) has hinted at further 50 basis points (bps) interest rate cuts as inflation nears its 3% target. This shift towards monetary easing contrasts with the US Federal Reserve’s (Fed) “slightly hawkish” stance. While Banxico is focused on stimulating economic growth, the Fed remains cautious, assessing the implications of US trade policies. This policy divergence has given the US Dollar an upper hand, posing downside risks for the Peso.
Key Market Movers Impacting the Peso
- Mexican Inflation Trends: Core inflation increased slightly to 3.63% year-over-year (YoY) in mid-February, while headline inflation stood at 3.74% YoY, in line with expectations.
- US-Mexico Trade Policies: The US government is pressuring Mexico to impose tariffs on Chinese imports, adding another layer of complexity to trade negotiations.
- Federal Reserve Rate Expectations: The swaps market anticipates a potential 58 bps Fed rate cut in 2025, up from last week’s 40 bps projection, according to data from the Chicago Board of Trade (CBOT).
- Trade Volatility Risks: The 30-day pause in US-Mexico trade discussions is nearing its end, raising the potential for renewed volatility in the USD/MXN pair.
USD/MXN Technical Analysis: Peso Faces Key Resistance Levels
The USD/MXN pair has climbed above the 50-day Simple Moving Average (SMA) at 20.45, with further gains pushing it above 20.50. The Relative Strength Index (RSI) remains above 50, indicating bullish momentum. To sustain further upside, the pair must clear key resistance at the January 17 high of 20.93, followed by the psychological level of 21.00 and the year-to-date (YTD) high of 21.28.
On the downside, if USD/MXN fails to maintain its position above the 50-day SMA, it could retrace towards the 100-day SMA at 20.24. A break below this level may drive the pair lower, testing the 20.00 threshold.
Banxico’s Role in Peso Stability
Banxico, Mexico’s central bank, plays a critical role in maintaining currency stability and controlling inflation. With inflation nearing the 3% target, Banxico has signaled potential rate cuts, which could weigh on the Peso. The interest rate differential between Banxico and the Fed is a key determinant of USD/MXN fluctuations, with lower Mexican rates potentially weakening the currency.
Banxico typically meets eight times a year, closely monitoring Fed policies before making decisions. In past instances, Banxico has preemptively adjusted rates to prevent excessive Peso depreciation and capital outflows. The bank’s next moves will be crucial in determining the Peso’s trajectory amid evolving trade tensions and global economic shifts.
