The Mexican Peso (MXN) weakened against the US Dollar (USD) on Friday following inflation data that reinforced Banco de México’s (Banxico) decision to cut interest rates by 50 basis points. Meanwhile, mixed employment data in the United States (US) saw payroll figures fall short of expectations, though the Unemployment Rate improved. As a result, USD/MXN climbed 0.86% to 20.60.
Mexico’s Inflation Trends Lower, Paving Way for Further Rate Cuts
Inflation in Mexico slowed more than anticipated in January, according to data from the Instituto Nacional de Estadística, Geografía e Informática (INEGI). Both headline and core inflation remained within Banxico’s target range of 3% ±1%, marking an improvement from previous levels and increasing the likelihood of further monetary easing.
On Thursday, Banxico lowered its benchmark interest rate from 10% to 9.50% and signaled the possibility of another similar cut in upcoming meetings. Officials forecast inflation to reach the 3% target by the third quarter of 2026.
USD/MXN Gains as US Labor Market Data Sparks Market Reaction
The USD/MXN exchange rate extended its gains following the latest US Nonfarm Payrolls report. Although job creation fell short of expectations, a dip in the Unemployment Rate provided support for the US dollar.
The interest rate differential between Mexico and the US is also expected to shrink. Banxico’s latest private economist poll projects Mexico’s reference rate dropping to 8.50%. Meanwhile, the Federal Reserve (Fed) has paused its easing cycle, forecasting two rate cuts in 2025, according to its December Summary of Economic Projections (SEP).
Market Movers: Key Developments Impacting the Mexican Peso
Mexico’s Consumer Price Index (CPI) rose 3.53% year-over-year in January, down from 4.21% in December and below the expected 3.61%. Core CPI increased slightly to 3.66% from 3.65%, but remained below the forecasted 3.70%.
Mexico’s disinflation trend and a 0.6% economic contraction in the last quarter were key factors behind Banxico’s rate cut.
Banxico’s decision was not unanimous, with Deputy Governor Jonathan Heath voting for a smaller 25-basis-point cut. The central bank’s board is currently split, with four dovish members and Heath as the lone hawk.
US Nonfarm Payrolls for January came in at 143,000, down from 256,000 and missing the projected 170,000. However, the Unemployment Rate fell from 4.1% to 4%.
US-Mexico trade tensions remain a concern, with a 30-day pause in tariff discussions providing temporary relief. However, uncertainty persists as February’s end approaches.
Futures markets are pricing in 39 basis points of Federal Reserve rate cuts in 2025.
Technical Outlook: Mexican Peso Faces Further Downside Risks
USD/MXN has been consolidating between 20.30 and 20.70 for the past four days following volatility triggered by US tariff announcements. The pair remains in an upward trend, finding key support at the 50-day Simple Moving Average (SMA) of 20.57.
A breakout above 20.70 could see USD/MXN test the January 17 peak of 20.90, followed by resistance at 21.00 and the year-to-date high of 21.29.
Conversely, a drop below the 50-day SMA would bring the 100-day SMA at 20.22 into focus. A further decline could push the pair toward the psychological 20.00 level.
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