Why is the Mexican Peso resisting Fed hike bets as Banxico signals a longer pause?

USD/MXN slips towards 18.60 as the Mexican Peso regains ground.
Fed tightening expectations strengthen as US Core CPI stays at 0.3% MoM.
Despite higher Mexican inflation, Banxico indicates an extended pause at 6.25%.

The Mexican Peso (MXN) regained some ground against the US Dollar (USD) on Wednesday, recovering after the previous week’s 0.45% decline. The rebound followed a stronger-than-expected US inflation report that raised the likelihood of further tightening by the Federal Reserve (Fed). USD/MXN stands at 18.60 at the time of writing, a decline of 011%.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Why is USD/MXN easing towards 18.60 despite robust Dollar demand?

Expectations for October US inflation were exceeded even as headline CPI slowed to 0.4% MoM from 0.6%. For a third consecutive month, core inflation held at 0.3% MoM, surpassing economists’ forecast of 0.2% and matching the prediction of Fed Governor Christopher Waller, who indicated that he could favour a 50-basis-point rate increase if underlying inflation reached 0.3%.

According to the CME FedWatch Tool, money markets responded to the report by raising their bets on a 25 basis point Fed rate increase in December. A quarter-percentage-point December hike is also the expectation at banks including Deutsche Bank and Goldman Sachs.

With expectations of tighter policy gaining ground, the US Dollar Index (DXY) has advanced 0.69% to 102.91 after earlier touching an 18-month high of 102.96. The index measures the US currency’s performance against six currencies.

Above-forecast inflation figures were released on Monday by Mexico’s National Statistics Agency, known as INEGI. October’s annual inflation accelerated to 3.75% from 3.45%, while the measure excluding volatile items rose by 3.8% YoY, against an estimated 3.78%. Both readings indicate that last week’s rate cut by the Bank of Mexico (Banxico) was unwarranted, even though the Governing Board acknowledged that inflation risks remain skewed to the upside.

In an interview with El Financiero, Banxico’s Governor Rodriguez Ceja said the board had been considering rate cuts since October. Discussing the period following the cut, she added that “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 economic calendar ahead, traders are taking their cues from developments in the US. North of the border, jobless claims, housing figures, comments from Fed speakers and producer inflation are on the schedule by the weekend.

USD/MXN Price Forecast: Does the technical picture favour further gains?

Chart Analysis USD/MXN — USD/MXN: daily price chart

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

The cluster of three SMAs around 18.01 offers initial support. Only a break below this area would weaken the current positive structure and open the way to steeper losses. Further down, the horizontal level at 16.89 provides the next significant floor, representing a more distant but noteworthy demand zone. While prices remain comfortably above these support levels, USD/MXN retains an upward bias, with further gains looking likely once fresh resistance levels emerge on the charts.

(An AI tool assisted in preparing this story’s technical analysis. Learn more.)

Mexican Peso: Frequently asked questions

Which key influences shape the Mexican Peso’s performance?

Among Latin American currencies, the Mexican Peso (MXN) attracts the highest trading activity. The health of Mexico’s economy, central bank policy, foreign investment inflows and remittances from Mexicans living overseas, especially in the United States, broadly determine its value. Geopolitical developments can influence MXN as well. Nearshoring, for instance, involves companies moving manufacturing capacity and supply chains nearer to their home countries. This is viewed as a driver of the Mexican currency because Mexico is regarded as a major manufacturing hub in the American continent. Oil prices are another influence on MXN, given Mexico’s importance as an exporter of the commodity.

Why do Banxico’s policy decisions matter for the Mexican Peso?

Keeping inflation low and stable is the primary mandate of Mexico’s central bank, Banxico. Its aim is to keep inflation at or near 3%, the midpoint of a tolerance range running from 2% to 4%. The bank sets interest rates at a suitable level to achieve this objective. If inflation becomes too high, Banxico seeks to contain it through rate increases. These raise borrowing costs for households and businesses, moderating demand and cooling the wider economy. By offering higher yields and making Mexico more appealing to investors, higher interest rates generally support the Mexican Peso (MXN). Lower rates, by contrast, typically put pressure on MXN.

Why can economic releases move the Mexican Peso?

The Mexican Peso’s (MXN) valuation can respond to macroeconomic releases, which provide important evidence of the economy’s condition. Robust growth, low unemployment and strong confidence underpin a healthy Mexican economy and are supportive of MXN. Such conditions draw additional foreign investment and may also prompt the Bank of Mexico (Banxico) to raise interest rates, especially when economic strength is accompanied by high inflation. Weak economic readings, in contrast, are likely to bring depreciation in MXN.

How does the Mexican Peso respond to wider risk appetite?

Risk-on conditions generally favour the Mexican Peso (MXN), an emerging-market currency. When investors judge wider market risks to be low, they are more willing to take on higher-risk investments, helping MXN perform well. During market turmoil or economic uncertainty, however, investors typically shed riskier assets in favour of more stable safe havens, and MXN tends to lose ground.