• The Mexican peso strengthened after the Trump-Sheinbaum call, reversing some of the losses caused by Trump’s earlier threats.
• The Banxico protocols reflect the possibility of further adjustments to interest rates based on the inflation outlook.
• The Fed’s favorite inflation gauge suggests prices remain high, justifying its gradual approach.

The Mexican peso strengthened against the US dollar on Thursday under pressure from Trump’s tariff threat. Upbeat news from a phone call between United States (US) President-elect and Mexican President Claudia Sheinbaum weighed on the exotic pair as the peso recovered and pared its weekly losses. The USD/MXN rate is 20.41, down 0.72%.

The conversation between Sheinbaum and Trump revealed that both countries had found common ground to resolve their issues. On his Truth Social network, Trump reported that he “had a great conversation with the new president of Mexico, Claudia Sheinbaum Pardo. “She agreed to end migration through Mexico.” He added that they discussed how they could “stop the massive flow of drugs into the US.”

Following this entry, the USD/MXN pair began to decline, reaching a up-to-date year-to-date (YTD) high of 20.82 on Monday.

On the monetary policy front, the Bank of Mexico (Banxico) revealed in its minutes that the inflation scenario will allow further adjustments to interest rates.

On the other side of the border, the Federal Reserve’s (Fed) preferred measure of inflation, the Price Index for Basic Consumer Expenditures (PCE), rose 2.8% y/y in October, up from 2.7% in September and in line with analyst estimates. This justifies the gradual approach Fed policymakers have taken to monetary policy since their last meeting in early November.

For the coming week, Mexico’s report will remain brilliant, although it will include data on the fiscal balance. However, USD/MXN traders should be aware of political developments, including US President-elect Donald Trump’s social media posts.

Daily Market Change Summary: Mexican Peso Will Remain Volatile – Banxico

• Banxico board members noted that the Mexican peso was broad, depreciating and volatile, largely due to uncertainty surrounding the U.S. elections.
• They added that inflation risks are tilted to the upside, mentioning greater exchange rate depreciation. They acknowledged that the inflation outlook continued to require a restrictive policy stance.
• In the bank’s quarterly report, Banxico Governor Victoria Rodriguez said it was monitoring the recent peso volatility and added there was no need to intervene in the forex market.
• The quarterly report revealed that Banxico said the Mexican economy will grow 1.8% in 2024, up from 1.5%. Nevertheless, the central bank maintained its gross domestic product (GDP) projection for 2025 at 1.2%.
• The CME FedWatch Tool suggests investors see a 66% chance of a 25 basis point (bps) rate cut at the U.S. central bank’s December meeting, down from 59% a day ago.
• Data from the Chicago Board of Trade, via the December Fed Funds Rate Futures contract, shows investors estimate the Fed will ease 24 basis points by the end of 2024.

USD/MXN Technical Outlook: Mexican Peso Recovers as USD/MXN Falls Below 20.50

The USD/MXN pair continues to trend higher despite hitting an intraday low of 20.20. Despite some bounce, it remains below the psychological level of 20.50, which means the bulls are not out of the woods. If they want to extend the uptrend, they need to break the 20.50 level and then the year-to-date high of 20.83 before the 21.00 level. Once these levels are cleared, the bulls will hit the March 8, 2022 high at 9:46 PM and then the November 26, 2021 high at 10:15 PM.

Conversely, if bears pull the exchange rate below 20.00, the next support will be the 50-day elementary moving average (SMA) at 19.90. Key support levels are below the latter, with the 100-day SMA at 19.45, ahead of the psychological mark of 19.00.