- The Mexican peso rose amid a weaker US dollar and lower trade concerns, shrugging off mixed Mexican economic activity data.
- Inflation fell mid-month to 3.69% year-on-year, close to Banxico’s target of 3%, supporting dovish policy.
- Trump’s moderate comments on Mexico at World Economic Forum downplay trade concerns; Key GDP and trade data are expected.
The Mexican peso (MXN) edged higher in early trading during the North American session as Mexico’s economic growth figures emerged mixed, although widespread weakness in the US dollar (USD) kept the peso bid. At the time of writing, the USD/MXN peso is trading at 20.16, down 1%.
The National Institute of Geostatistics and Informatics (INEGI) revealed that economic activity for November improved month-on-month but not year-on-year. With gains of more than 2.70%, the Mexican currency is set to record its best weekly performance since September 2024.
United States President Donald Trump tempered his comments on Mexico and made upbeat remarks about the country at the World Economic Forum (WEF), alleviating trade policy concerns and fostering a decline in the USD/MXN pair.
Meanwhile, inflation fell in mid-January towards the Bank of Mexico’s (Banxico) target of 3%. The Consumer Price Index (CPI) rose 3.69% year-on-year, from 4.44% reported in December, while the core CPI rose moderately from 3.62% to 3.72% year-on-year.
In the United States, S&P Global revealed that manufacturing activity emerged from the contraction zone but failed to support the dollar. Meanwhile, consumer confidence revealed by the University of Michigan (UoM) deteriorated compared to preliminary assessments, while housing data improved through existing home sales.
The Mexican economy has continued to slow and is expected to grow by just 1% in 2025. The slowdown has benefited the process of lower inflation and supported Banxico’s dovish stance.
The Federal Reserve (Fed) is expected to keep interest rates unchanged. The primary reasons the Board made this decision were the strength of the U.S. economy, as evidenced by healthy economic growth, a strong labor market and more stable inflation numbers.
Next week, Mexico’s economic calendar will feature trade balance, jobs data and the preliminary GDP reading for the fourth quarter of 2024.
Daily summary of market drivers: Mexican peso rises amid mixed economic activity numbers
- The Mexican peso advances against the US dollar even though the lowest inflation figures suggest Banxico will cut interest rates. In contrast, the Fed is expected to keep monetary policy unchanged and await its March meeting.
- INEGI revealed that economic activity for November improved from -0.7% to 0.4% on a monthly basis. In the 12-month period, the numbers fell from 0.8% to 0.5%, exceeding the expected 0.6%.
- Citi unveiled its forecast survey, in which private Mexican economists revised 2025 GDP numbers down to 1%.
- Regarding inflation expectations, analysts expect headline and core inflation to fall below 4%, at 3.91% and 3.68% each, while the exchange rate is likely to end near 20.95.
- Economists estimate that the Bank of Mexico (Banxico) will cut interest rates by 25 basis points from 10.00% to 9.75%, although some analysts expect a 50 basis point cut at the February 6 meeting.
- The US global S&P manufacturing PMI for December rose 50.1 from 49.4, beating expectations. Meanwhile, the services PMI deteriorated from 56.8 to 52.8.
- Money market futures are priced in for 45 basis point Fed rate cuts in 2025, according to CME FedWatch Tool data.
USD/MXN Technical Forecast: Mexican Peso rises as USD/MXN falls below 20.30
The USD/MXN pair is below the 50-day simple moving average (SMA) at 20.37 and extending its losses towards the 100-day SMA at 20.22, but bears failed to push prices below the latter, as it consolidates near Mid point range 20.20 – 20.30.
Momentum has turned to the downside as shown by the Relative Strength Index (RSI). Therefore, if the USD/MXN falls below 20.20, the next support will be 20.00. In case of further weakness, the next support will be the November 7 low of 19.75, ahead of the October 18 low of 19.64.
Conversely, for a bullish resumption, USD/MXN must rise above 20.55 so that buyers have a clear path to challenge the year-to-date high of 20.90. Once passed, the next stop will be at 21.00, followed by March 8, 2022, reaching a peak at 21.46 before the 22.00 figure.
Frequently asked questions about Banxico
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to maintain the value of the Mexican currency, the Mexican peso (MXN), and to set monetary policy. To this end, his main goal is to maintain a low and stable inflation rate within target levels – at or near his target of 3%, the midpoint in a tolerance range of 2% to 4%.
Banxico’s main tool for directing monetary policy is setting interest rates. When inflation exceeds the target, the bank will try to tame it by raising interest rates, which increases the cost of borrowing for households and businesses and thus cools the economy. Higher interest rates are generally a positive for the Mexican Peso (MXN) because they lead to higher returns, making the country a more attractive place for investors. Conversely, low interest rates tend to weaken the Mexican peso. The spread with the US dollar, or the way Banxico is expected to set interest rates compared to the US Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year, and its monetary policy is heavily influenced by the decisions of the US Federal Reserve. Therefore, the central bank’s decision-making committee usually meets a week after the Fed’s meeting. In doing so, Banxico reacts to and sometimes anticipates monetary policy measures determined by the Federal Reserve. For example, after the Covid-19 pandemic, and before the Fed raised interest rates, Banxico did so first in an attempt to reduce the chances of a significant devaluation of the Mexican peso (MXN) and prevent capital outflows that could destabilize the country.