Mexican Peso resists Fed rate hike bets as Banxico points to extended pause

• USD/MXN slips towards 18.60 as Mexican Peso regains ground.
• With US Core CPI unchanged at 0.3% MoM, expectations of Fed tightening strengthen.
• Despite higher Mexican inflation, Banxico indicates rates will remain at 6.25% for an extended period.

A stronger-than-expected US inflation reading raised the likelihood of further tightening by the Federal Reserve (Fed). Against that backdrop, the Mexican Peso (MXN) regained ground against the US Dollar (USD) on Wednesday, having shed 0.45% in the previous week. USD/MXN stands at 18.60 at the time of writing, a decline of 011%.

USD/MXN slips towards 18.60 even as Dollar demand remains firm

Although October's US inflation reading surpassed forecasts, monthly headline CPI slowed to 0.4% from 0.6%. At 0.3% MoM, core inflation was unchanged for a third consecutive month and exceeded economists' 0.2% forecast  while matching the scenario outlined by Fed Governor Christopher Waller, who predicted he could favour a 50-basis-point rate increase if underlying inflation reached 0.3%.

Money markets responded by assigning a greater probability to a 25 basis points Fed rate increase in December, according to the CME FedWatch Tool. A quarter-percentage-point December rise is also anticipated by banks including Deutsche Bank and Goldman Sachs.

With expectations of tighter policy providing support, the US Dollar Index (DXY) has risen 0.69% to 102.91. The index, which measures the Dollar against six currencies, earlier reached 102.96, its highest level in 18 months.

Figures released on Monday by Mexico’s National Statistics Agency, known as INEGI, showed annual inflation accelerating to 3.75% in October from 3.45%, exceeding forecasts. Inflation excluding volatile items reached 3.8% YoY, above the 3.78% estimate. Taken together, the readings suggest that last week's rate cut by the Bank of Mexico (Banxico) was unjustified, even though the Governing Board acknowledged that inflation risks were skewed to the upside.

In an interview with El Financiero, Banxico Governor Rodriguez Ceja said the board had been considering rate reductions since October. Following the cut, she added, “maintaining the rate at its current level – 6.25% – for an extended period will support the convergence of inflation to the target and will be adequate to address external macroeconomic challenges.”

With little on Mexico's upcoming economic calendar, traders are taking their lead from developments in the US. North of the border, jobless claims, housing figures, comments from Fed officials and producer inflation are due before the weekend.

USD/MXN Price Forecast: Near-term bullish bias holds

At 18.60 on the daily chart, USD/MXN retains a bullish near-term bias, with spot trading comfortably above the cluster of three simple moving averages (SMAs) around 18.01. Having regained and extended above this gauge of the medium-term trend, the pair appears supported on pullbacks. Meanwhile, the Relative Strength Index (RSI) has retreated from earlier overbought extremes to 54, signalling more balanced, though still constructive, momentum following the recent consolidation.

Initial downside support lies around 18.01 at the cluster of three SMAs. A breach would be required to weaken the current positive technical structure and open the way to further losses. The next significant floor below that area is the horizontal 16.89 level, a more distant but notable zone of demand. Provided the pair remains comfortably above these supports, USD/MXN appears inclined to advance further once fresh resistance levels take shape on the charts.

(The technical analysis of this story was written with the help of an AI tool. Know more.)