The Mexican Peso erases some of its earlier gains and drops some 0.13% as the USD/MXN pair advances after the Bank of Mexico (Banxico) cut rates and warned that the easing cycle has ended. The exotic pair trades at 17.27 after testing a low of 17.19.
USD/MXN rebounds after Banxico signals pause, Middle East risks rise
Markets’ sentiment swung from strong optimism to pessimism as the US launched attacks on several targets in the Strait of Hormuz, according to a US official, as reported by Axios’ Ravid. In the meantime, Iran’s top military command said that the US violated the ceasefire, targeting an Iranian oil-flagged vessel and another ship entering the Strait of Hormuz.
Aside from this, Banxico’s decision to cut interest rates by 25 basis points, as expected, from 6.75% to 6.50%, is weighing on the Mexican currency, which has so far appreciated by over 4% year-to-date (YTD). The decision to lower rates was not unanimous; it was a 3-2 vote, with Deputy Governors Galia Borja and Jonathan Heath voting to hold rates unchanged.
Worth noting that Banxico warned that “Looking ahead, the governing board estimates that it will be appropriate to maintain the reference rate at its current level.” Therefore, the easing cycle, which began in March 2024, has ended.
Banxico’s monetary policy statement revealed that the board considers “The balance of risks for the trajectory of inflation within the forecast horizon remains biased to the upside.” Despite this, considered to lower rates based on “the observed levels of the exchange rate, the weakness of economic activity, which implies the absence of demand-related pressures in the economy, and the level of monetary restriction implemented.”
The board also updated its inflation forecasts, expecting headline and underlying inflation to hit their 3% goal by the second quarter of 2027.
In the US, jobless claims data were solid, rising by 200K in the week ending May 2, below estimates of 205K but exceeding forecasts of 190K. Other data showed that the US Challenger Job Cuts rose from 60.62K to 83.687K, according to Challenger, Grey & Christmas.
Earlier, some Federal Reserve officials commented on monetary policy and inflation. Cleveland Fed’s Beth Hammack expects rates to remain on hold for some time, noting growing concerns about persistent inflation. San Francisco Fed’s Mary Daly reaffirmed the commitment to the 2% inflation target, describing policy as slightly restrictive and suggesting that prices would ease if geopolitical tensions subside. Minneapolis Fed President Neel Kashkari called inflation too high and expressed optimism about AI.
Given the fundamental backdrop and the end of Banxico’s easing cycle, the USD/MXN might consolidate in the near term, but the interest rate differential continues to favour the Mexican Peso. But if geopolitical tensions in the Middle East arise, it could open the door to a depreciation of the Peso due to haven flows into the US Dollar.
USD/MXN Price Forecast: Technical outlook
The USD/MXN seems to have bottomed at around the February 8 daily low of 17.08, as the Mexican central bank continued to lower borrowing costs. During the year, the interest rate differential reduced by 75 basis points, and with Banxico announcing a pause, this could open the door for a slight recovery.
High geopolitical risks will keep the US Dollar bid, while emerging-market currencies could depreciate. In that outcome, the pair’s first resistance would be the 20-day Simple Moving Average (SMA) at 17.40. On further strength, the next stop would be the 50-day SMA at 17.49, ahead of the 100-day SMA at 17.64.
On the other hand, if the Peso appreciates, the first support seen is the year-to-date (YTD) low of 17.08, ahead of the 17.00 figure.
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.
