Mexican Peso withstands Fed rate hike bets amid Banxico signals of a longer pause

18.60 in view as USD/MXN slips and Mexican Peso rebounds.
0.3% MoM US Core CPI reading sustains expectations of Fed tightening.
6.25% rate set for extended hold, Banxico signals, despite higher Mexican inflation.

USD/MXN stands at 18.60. The pair is down 011% at the time of writing, with the Mexican Peso (MXN) regaining ground against the US Dollar (USD) on Wednesday after a 0.45% loss the previous week. The recovery follows a stronger-than-expected US inflation report that raised the likelihood of further tightening by the Federal Reserve (Fed).

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

18.60 in focus as USD/MXN falls despite firm Dollar demand

Although October US inflation surpassed expectations, monthly headline CPI slowed to 0.4% from 0.6%. Monthly core inflation held at 0.3% for a third consecutive month, exceeding economists’ 0.2% forecast and matching the scenario outlined by Fed Governor Christopher Waller: an underlying inflation reading of 0.3% could lead him to favour a 50-basis-point rate increase.

According to the CME FedWatch Tool, money markets priced in a greater likelihood of a 25 basis points Fed rate increase in December after the release. Deutsche Bank and Goldman Sachs are among the banks anticipating a quarter-percentage-point rise that month.

Expectations of tighter policy have helped lift the US Dollar Index (DXY) by 0.69% to 102.91. The index, which measures the Dollar against six currencies, earlier reached 102.96, an 18-month high.

Mexico’s National Statistics Agency, INEGI, reported on Monday that annual inflation accelerated to 3.75% in October from 3.45%, beating forecasts. The measure excluding volatile items increased by 3.8% YoY, above the 3.78% estimate. Together, the readings suggest last week’s rate reduction by the Bank of Mexico (Banxico) was unwarranted, even though its Governing Board acknowledged that inflation risks remain skewed upwards.

In an interview with El Financiero, Banxico Governor Rodriguez Ceja said the board had been considering rate cuts since October. Following the reduction, 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 few domestic releases ahead, traders are looking to US developments for direction. The calendar north of the border includes jobless claims, housing figures, remarks from Fed officials and producer inflation before the weekend.

18.60 USD/MXN Price Forecast: Near-term technical bias stays bullish

Chart Analysis USD/MXN — 18.60 USD/MXN: Daily chart

At 18.60 on the daily chart, USD/MXN retains a bullish short-term bias. Spot remains comfortably above the cluster of three simple moving averages (SMAs) near 18.01. Having regained and extended above this medium-term trend gauge, the pair continues to show support on pullbacks. Meanwhile, the Relative Strength Index (RSI) has retreated from earlier overbought extremes to 54. Following the recent consolidation, momentum is more balanced but remains constructive.

Initial downside support lies around 18.01 at the three-SMA cluster. A break below this area would be required to weaken the positive technical structure and open the way to larger losses. The next significant support is the horizontal 16.89 level, a more distant but notable demand zone. While USD/MXN remains well above these supports, the bias favours further gains once new resistance levels emerge on the charts.

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

Mexican Peso: Key questions answered

Mexican Peso: Main exchange-rate drivers

Among Latin American currencies, the Mexican Peso (MXN) has the highest trading activity. Its exchange rate largely reflects Mexico’s economic performance, central bank policy, foreign investment inflows and remittances from Mexicans overseas, especially those living in the United States. Geopolitical developments can influence MXN as well. Nearshoring, whereby companies move manufacturing capacity and supply chains closer to their home markets, is viewed as a potential catalyst for the currency because Mexico is a major manufacturing hub in the Americas. Oil prices are another driver, given Mexico’s position as a key exporter of the commodity.

Banxico policy: Implications for the Mexican Peso

Keeping inflation low and stable is the primary mandate of Mexico’s central bank, Banxico. Its target is at or near 3%, the midpoint of a tolerance range from 2% to 4%. The bank sets interest rates at a level suited to that objective. If inflation becomes excessive, Banxico seeks to restrain it through higher rates. More expensive borrowing for households and businesses dampens demand and slows the broader economy. Higher rates typically support the Mexican Peso (MXN), as the resulting rise in yields increases Mexico’s appeal to investors. Lower rates, by contrast, generally put downward pressure on MXN.

Economic data: Effects on Mexican Peso valuations

Economic releases provide essential evidence of the economy’s health and can move the Mexican Peso (MXN). Robust growth, low unemployment and strong confidence underpin a healthy Mexican economy and support the currency. Such conditions attract additional foreign investment and may also prompt the Bank of Mexico (Banxico) to raise rates, especially when economic strength coincides with high inflation. Weak data, on the other hand, make MXN depreciation more likely.

Risk sentiment: Support and pressure for the Mexican Peso

Risk-on conditions generally favour the Mexican Peso (MXN), an emerging-market currency. When investors judge overall market risks to be low, they are more willing to buy higher-risk investments. During market disruption or economic uncertainty, the opposite tends to occur: investors sell riskier assets and seek more stable safe havens, usually weakening MXN.