Mexican Peso climbs ahead of Banxico’s decision

• Mexican Peso shrugs off two straight days of losses as economists expect “large size” Banxico rate cut.
• Banxico's potential 50 bps rate cut reflects Mexico’s cooling inflation and economic contraction.
• Narrowing interest rate differential with the Fed and gloomy consumer confidence in Mexico could influence future currency trends.

The Mexican Peso (MXN) appreciated during the North American session as traders braced for Banco de Mexico's (Banxico) first monetary policy decision of 2025. At the time of writing, USD/MXN trades at 20.51, down 0.19%.

Banxico is expected to cut rates by 50 basis points, from 10% to 9.50%, according to economists polled by Reuters. Mexico’s latest inflation figures for the first fifteen days of January reached the Central Bank’s target of 3% plus or minus 1%, indicating that prices are coming down.

In addition, the economy contracted in the last quarter of 2024 for the first time in more than three years. Banxico’s Governor Victoria Rodriguez Ceja said the bank would consider cuts larger than 25 basis points during the year's first meetings.

The interest rate differential between Banxico and the Federal Reserve (Fed) would narrow from 5.50% to just 5%. Additionally, private economists estimate that the Mexican Central Bank would lower interest rates to 8.50%, while the Fed is projected to stay on hold as officials assess US President Donald Trump's trade policies.

Data-wise, Mexico’s Consumer Confidence deteriorated for the third consecutive month as consumers became pessimistic about the economic outlook for one year. Across the north of the border, the number of Americans filing unemployment claims increased above estimates and the previous week’s numbers.

USD/MXN traders will eye Banxico’s decision at 19:00 GMT. Alongside that, Fed officials would cross the wires.

Daily digest market movers: Mexican Peso awaiting Banxico's move for direction

• Banxico’s reasons to cut rates are driven by January’s mid-month inflation, which came in at 3.69% YoY, its lowest level since 2021, after hitting a two-decade high above 8% in 2022. Furthermore, the Gross Domestic Product (GDP) for Q4 2024 contracted -0.6% QoQ, the first quarterly contraction in more than three years.
• INEGI revealed that Mexico’s Consumer Confidence in January fell from 47 to 46.7. The poll showed that Mexicans are more pessimistic about the current economic situation and its prospects for the next 12 months.
• US Initial Jobless Claims missed the mark for the week ending February 1. The number of Americans filing for unemployment benefits rose by 219K, up from 208K the previous week and exceeded forecasts of 213K.
• Trade disputes between the US and Mexico remain in the boiler room. Although countries found common ground, USD/MXN traders should know that there is a 30-day pause and that tensions could arise throughout the end of February.
• Money market fed funds rate futures are pricing in 47.5 basis points (bps) of easing by the Federal Reserve in 2025.

USD/MXN technical outlook: Mexican Peso strengthens as USD/MXN tumbles below 20.50

The USD/MXN’s pair uptrend remains in place despite the ongoing pullback. Buyers seem to be leaning into the 50-day Simple Moving Average (SMA) at 20.41, which found support, keeping the pair from testing key support levels.

In the short term, momentum turned bearish, as depicted by the Relative Strength Index (RSI). If USD/MXN tumbles below the 50-day SMA, sellers could challenge the 100-day SMA at 20.22. Once cleared, further downside is seen, and the pair could challenge 20.00.

Conversely, and the most likely scenario, if USD/MXN rises above 20.50, look for a test of the January 17 daily peak at 20.90 before testing 21.00 and the year-to-date (YTD) high at 21.29.