In a week marked by fluctuating economic indicators from the U.S., the Mexican Peso gained 0.50% against the U.S. Dollar, raising expectations that the Federal Reserve might soon lower interest rates. As Friday unfolded with minimal economic announcements and slight adjustments in U.S. import and export prices, the USD/MXN exchange rate settled at 20.11, down from an earlier peak of 20.26.
This week saw a sparse economic calendar in both Mexico and the U.S., with U.S. import prices inching up while export prices dipped in November. Meanwhile, Mexico’s own data indicated a slower pace of inflation than anticipated, both in headline and core metrics for November. This has strengthened beliefs in a potential rate cut by the Bank of Mexico (Banxico) during its upcoming meeting on December 19.
Adding to the economic narrative, consumer confidence in Mexico declined from 49.5 to 47.7 in November, and figures released on December 12 showed ongoing challenges in industrial production, with negative monthly and annual growth logged, reflecting a sluggish economy.
Despite these factors, the Peso maintained a downward trajectory against the dollar. The U.S. Dollar Index (DXY), which tracks the dollar against a basket of six major currencies, saw gains over six consecutive days, holding near 107.00. However, the Peso faced external pressure from strong comments by U.S. President-elect Donald Trump. He has threatened to impose hefty tariffs on Mexican goods unless actions are taken to curb illegal immigration and drug trafficking.
Nonetheless, the Mexican currency continued to appreciate, driven by the current interest rate differential. With expectations of interest rate reductions from the Fed and Banxico, the USD/MXN pair may cut further, potentially reaching 20.00 as the year draws to a close.
Diving into the market dynamics, the slight 0.1% month-on-month rise in U.S. import prices surpassed expectations, while export prices remained unchanged, both beating projected declines. Banxico seems poised to decrease its key interest rate by 25 basis points to 10.00% according to the swaps market, with Governor Victoria Rodriguez Ceja maintaining a dovish stance. Her recent remarks highlight the possibility of continued rate cuts if disinflation progresses as expected. Analysts from JPMorgan speculate a more aggressive 50-basis-point reduction, given how swiftly inflation appears to be cooling.
Traders are closely watching the Federal Reserve’s meeting slated for December 17-18, with a 93% chance of a 25 basis point rate cut anticipated. Following this decision, investors will be particularly attentive to Fed Chair Jerome Powell’s press conference for insights into the 2025 policy direction.
Technically, the USD/MXN has consolidated between the 20.00 and 20.25 range for five days, showing neither the strength to break above nor below this band. With momentum pointing downwards as seen in the Relative Strength Index (RSI), the exchange rate may further decline. Key support lies at the 50-day Simple Moving Average (SMA) of 20.07, with a subsequent target of 20.00 and potentially reaching the 100-day SMA at 19.70 if the trend continues.
On the flip side, if the USD/MXN surpasses 20.25, it might encounter immediate resistance at 20.50. Breaking through could see it challenge the December 2 high of 20.59, possibly extending to the year’s peak of 20.82, and then heading toward the 21.00 mark.
Looking ahead, all eyes will be on the upcoming central bank meetings, as any shifts in interest rates could further sway the exchange rates, impacting traders and investors alike.
