The Mexican Peso (MXN) reversed its earlier gains and depreciated against the US Dollar (USD) on Friday following inflation data in Mexico that justified the recent interest rate cut by Banco de Mexico (Banxico). The USD/MXN pair traded at 20.60, up 0.86%, as the market digested the implications of the central bank’s policy move.
Inflation Data and Banxico’s Rate Cut
Inflation in Mexico edged lower in January, falling within the central bank’s target range of 3% ± 1%. Both headline and core inflation improved compared to previous reports, opening the door for additional rate cuts by Banxico. The Instituto Nacional de Estadística y Geografía (INEGI) revealed the data, which showed that inflation was lower than expected.
In response to the inflation data, Banxico decided to cut its benchmark interest rate by 50 basis points, from 10% to 9.50%. The central bank also hinted that further cuts could be on the horizon, with an expectation that inflation would converge to the 3% target by the third quarter of 2026.
US Employment Data and Dollar Strength
The USD/MXN extended its gains following the release of mixed US Nonfarm Payrolls (NFP) data. Although payrolls came in below expectations, the Unemployment Rate edged lower, which provided some support for the US Dollar.
Additionally, the interest rate differential between Mexico and the US is expected to narrow, with Banxico likely to reduce the primary reference rate further. A recent private economist poll suggests Banxico could lower rates to 8.50%. In contrast, the Federal Reserve has paused its easing cycle and projected two rate cuts in 2025, as per its Summary of Economic Projections (SEP) from December.
Technical Levels and Market Outlook
The USD/MXN has been consolidating in the 20.30 – 20.70 range over the past few days, with a volatile session earlier in the week due to concerns over President Trump’s tariffs on Mexico. The pair remains upward-biased, supported by the 50-day Simple Moving Average (SMA) at 20.57.
If the pair moves past the 20.70 level, the next resistance level could be the January 17 peak at 20.90, followed by the psychological level of 21.00 and the year-to-date high at 21.29.
On the downside, if USD/MXN falls below the 50-day SMA, the next support would be the 100-day SMA at 20.22. A break below this level could lead to further downside, with the pair potentially testing the 20.00 mark.
Overall, the combination of Banxico’s rate cuts and the narrowing interest rate differential between Mexico and the US is likely to keep USD/MXN upward biased, though technical levels and geopolitical factors, such as potential tariffs, will continue to influence the currency pair’s movements.
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