The USD/MXN exchange rate has recently pulled back, ending the strong Mexican peso sell-off a few weeks ago. It retreated from this month’s high of 20.93 to the current 20.40 and is hovering near its lowest point since December 26. So, what will be the USDMXN forecast ahead of the Fed and Mexico rate decision?
Mexico’s central bank decision ahead
The USD/MXN exchange rate has pulled back as investors focus on the upcoming interest rate decision and the threat of tariffs from the United States.
Donald Trump, the newly inaugurated American president, has warned that he will impose large tariffs on Mexican goods for allowing migrants to the country.
Mexico has responded that it would also retaliate with its tariffs on US goods, a move that would end the USMCA deal that Trump negotiated in his first term.
A trade war between the US and Mexico would have major impacts because of the volume of trade between the two countries. Data shows that the two countries do trade worth almost $1 trillion a year, with Mexico selling goods worth over $500 billion to the US.
Many American companies import goods from Mexico because of the lower cost of doing business there. Mexico has a minimum wage of about $20 per day, while many Americans earn that amount per hour.
Economists expect the cental bank to continue cutting rates in the next meeting scheduled on February 6. It has been in a rate-cutting cycle as it moved them from 11% in February last year to 10% today.
With inflation slowing and trade risks rising, economists expect the bank to deliver a jumbo rate cut next week. The most recent data showed that the headline Consumer Price Index (CPI) fell from 3.69% earlier this month from 3.99% in December.
Federal Reserve decision ahead
The other key USD/MXN news to watch is the Federal Reserve decision on Wednesday. This meeting will set the tone for what to expect later this year.
The Fed has already hinted that it will not cut interest rates in this meeting. The dot plot of the previous meeting pointed to two rate cuts this year, with experts predicting that it will happen in July.
Recent data has showed that US inflation is a big challenge for the economy. The headline Consumer Price Index rose from 2.7% in November to 2.9% in December. Core inflation dropped from 3.3% to 3.2% during the month.
These numbers are still significantly higher than the Fed’s target of 2.0%. Worse, inflation is not showing signs of falling, a move that may necessitate higher rates for a while.
There will be other key economic numbers to watch this week, including the US GDP and personal consumer inflation report.
USD/MXN technical analysis
USD/MXN chart by TradingView
The daily chart shows that the USD/MXN exchange rate peaked at 20.93 this month and then pulled back to 20.42. It formed a rising wedge chart pattern, which often leads to a strong bearish breakdown.
The pair has formed a bearish divergence as the MACD and the Relative Strength Index (RSI) have moved downwards. Therefore, the most likely scenario is where the USD to MXN exchange rate crashes, potentially to 19 after the Fed and Banxico decisions.
This retreat will happen as investors price in the impact of Donald Trump’s policies and their impact on the Mexican economy.
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