Mexican Peso advances unfazed by high US inflation, trade war

• Mexican Peso climbs, but the Fed-Banxico rate gap threatens its appreciation.
• US Producer Prices rise, delaying Fed rate-cut expectations to September.
• USD/MXN dips as US Dollar Index slides 0.55%, but policy divergence looms.

The Mexican Peso (MXN) gained modestly against the US Dollar (USD) on Thursday as further inflation data shows that prices in the United States (US) remain above the Federal Reserve’s (Fed) 2% target. Additionally, expectations about US President Donald Trump's signing of a reciprocal tariffs executive order late in the day have boosted the Greenback, trimming some losses against the emerging market currency. USD/MXN trades at 20.50, down 0.04%.

The latest round of US inflation data showed that prices paid by producers rose in January after the release of the Consumer Price Index (CPI) a day ago. Meanwhile, expectations that the Federal Reserve would cut rates lie at 35 basis points (bps), with traders delaying the first cut to September from June.

In the meantime, the US Bureau of Labor Statistics (BLS) showed that the labor market remains strong—the number of Americans filing for unemployment benefits diminished during the week ending February 8.

Despite this, the USD/MXN pair extended its losses due to the relief that US President Trump could sign reciprocal tariffs near 18:00 GMT, though they’re not expected to become effective until April 1.

Another reason for the sudden USD/MXN downside is that the buck is tumbling over 0.55%, as depicted by the US Dollar Index (DXY), down from 107.91 to 107.37.

Nevertheless, traders should be aware of the monetary policy divergence between Banco de Mexico (Banxico) and the Fed, which suggests that the interest rate differential would reduce substantially, favoring the latter. Therefore, USD/MXN could resume its uptrend in the near term.

Daily digest market movers: Mexican Peso advances as the Greenback gets battered

• Mexico’s economic docket remains absent, yet deterioration in the automobile industry and worse-than-expected Industrial Production figures hint the economy is in worse shape than expected.
• This and US President Donald Trump's trade rhetoric on Mexico would be headwinds for the Mexican currency.
• The US Producer Price Index (PPI) in January came at 0.4% MoM, exceeding forecasts of 0.3%, down from 0.5%. In the twelve months to the last month, PPI rose 3.5% above estimates and up from the 3.3 print in December.
• The Core PPI increased 0.3% MoM as expected and was up by 3.6% YoY, above estimates of 3.3%.
• Initial Jobless Claims for the week ending February 8 rose by 213K, below estimates of 215K, and the February 1 reading of 220K.
• The Fed adopted a cautious stance following the red-hot CPI and PPI January readings. As the disinflation process deteriorated, officials turned slightly neutral led by Fed Chair Powell who said on Wednesday “We are close but not there on inflation,” adding, “We want to keep policy restrictive for now.”
• Trade disputes between the US and Mexico remain in the boiler room. Although the countries found common ground previously, USD/MXN traders should know that there is a 30-day pause and that tensions could arise toward the end of February.

USD/MXN technical outlook: Mexican Peso holds firm near 20.50

The USD/XN pair consolidates near the 50-day Simple Moving Average (SMA) at around 20.50, with no clear bias during the last seven days. The distance between the 50 and 100-day SMAs has reduced sharply, indicating the bullish trend that began in April 2024 is losing steam after peaking at a multi-year high at 21.29.

If buyers want to regain control, they must clear key resistance levels like the January 17 high at 20.90, the 21.00 figure, and the year-to-date (YTD) at 21.29. Conversely, if USD/MXN drops below the 50-day SMA and clears the 100-day SMA at 20.23, it paves the way for challenging the 20.00 mark. On further weakness, key support levels are eyed at 19.50 and the 200-day SMA at 19.33.