The USD/MXN exchange rate has moved sideways in the past few weeks as traders eye the upcoming Federal Reserve and Banxico interest rate decision. The pair was trading at 20.11 on Friday, down by 3.45% from its highest level this month.
Federal Reserve decision
The USD/MXN pair will react to the upcoming Fed decision. In it, officials are expected to cut interest rates for the third time this year because of the relatively soft-ish labor market.
Data released earlier this month showed that the economy added over 200k jobs, while the labor participation rate retreated slightly. The unemployment rate rose slightly to 4.2% during the month.
These numbers mean that the labor market was not growing as initially expected. As a result, the Fed believes that cutting interest rates will help to ease the cost of doing business and boost the sector.
The Fed’s challenge is that US inflation is still a big challenge. Data released last week showed that the headline Consumer Price Index (CPI) rose from 2.4% to 2.6% in November.
Similarly, the core CPI remained unchanged at 3.3% during the month, much higher than the Fed’s target of 2.0%. Analysts expect that inflation may remain stubbornly higher, especially if Donald Trump implements his policies.
Trump has threatened to deport millions of undocumented migrants, a move that will affect key sectors of the economy like agriculture, hospitality, and construction.
He has also pledged to impose large tariffs on imports, a move he hopes will reduce the trade deficit. However, as history has shown, tariffs don’t solve trade deficits since they are just added to the final cost of goods.
Trade deficit is usually the difference between imports and exports. For the US to lower it, it would need to reduce imports, while dramatically increasing exports. The challenge is that the US does not sell many goods to other countries because of the higher cost if doing business.
Banxico interest rate decision
The next important USD/MXN exchange rate news will come out on Thursday when Mexico delivers its interest rate decision.
Like other central banks, Banxico has embarked on a rate cutting cycle, a move it hopes will support the ailing economy.
It started cutting rates in August, when it moved them from 11% to $10.75%. It has then cut rates two more times since then.
Economists see the bank cutting rates again in the next meeting as it prepares for the Trump era. In a recent X post, Trump warned that he would sign a 25% tariff on Mexican goods because the country has “allowed” illegal migrants
The Banxico is supported by the recent inflation flows. Recent data showed that Mexico’s Consumer Price Index (CPI) slowed from 4.76% to 4.55% in November, inside the bank’s target.
There are also signs that the Mexican economy is not doing well. It expanded by 1.6% in the third quarter, a big slowdown from the 2.1% growth in the previous quarter.
USD/MXN technical analysis
USD/MXN chart by TradingView
The USD/MXN exchange rate has remained under pressure in the past few weeks. It has retreated from a high of 20.82 to a low of 20.11. Along the way, it has moved below the lower side of the rising wedge chart pattern, a popular bearish reversal sign.
The pair remains between the 50-day and 25-day Exponential Moving Averages (EMA). It has also formed a double-top pattern at 20.82. A double-top is one of the most popular bearish signs in the market.
Therefore, the USD/MXN pair’s path of the least resistance will be downwards, with the next point to watch being at 19.50.
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