The USD/MXN exchange rate drifted upwards this week after Donald Trump ratcheted up his trade war rhetoric and after the Banxico slashed interest rates for the second consecutive meeting. It rose to a high of 20.30, up from this month’s low of 19.85.
US and Mexico trade war
The USD/MXN exchange rate rose slightly after Trump intensified his trade war against Mexico and other trade partners.
Trump will impose a 25% tariff on Mexican-made automobiles, a move that may push the country into a recession. That’s because a 25% tariff on vehicles is enormous, meaning that a car that cost $100,000 today will start costing $125,000.
It means that automobile spending in the US will start slowing down in the coming months. At the same time, if these tariffs remain, there are chances that some auto companies will start to expand their American operations.
The crisis in Mexico will likely escalate next week when Donald Trump launches his Liberation Day tariffs targeting goods from other countries. Mexico will be one of the targeted companies because of its large trade deficit with the United States. In Trump’s view, a country with a large surplus against the US is a sign that it is stealing from the US.
Therefore, there is s likelihood that the Mexican Central Bank will decide to maintain a dovish tone im the coming months. On Thursday, the Bank of Mexico decided to slash interest rates by a whopping 50 basis points to 9%. Rates have now slipped to the lowest level since 2022, and is a sign that the bank wants to support the economy.
Low interest rates support an economy by lowering the cost of borrowing and removing the incentive for companies and consumers to save their money in the bank and fixed income.
Banxico hopes to continue cutting interest rates this year as it expects the disinflation trend to continue this year. At the same time, analysts caution that the country will not avoid a recession now that a report showed that it crashed by 0.20% in the fourth quarter
US PCE data ahead
The next important catalyst for the USD/MXN pair will come out on Friday when the US releases the latest personal consumption expenditure (PCE) data. PCE is an important number that looks at the state of inflation in rural and urban areas.
Economists expect the data to show that the headline PCE inflation remained unchanged at 2.5% in February and at 0.3% on a YoY and MoM basis, consecutively.
The closely watched core PCE data is expected to increase from 2.6% to 2.7%.
These numbers are so important because they are the Federal Reserve’s favorite inflation gauge since they include prices in rural and urban areas.
However, their impact on the next Fed decision will be limited because they will not include the impact of tariffs. Also, these numbers will likely not change the Federal Reserve’s view of interest rates in the US.
Fed officials have hinted that they will maintain their high interest rates in the near term because of the impact of tariffs on inflation.
USD/MXN technical analysis
The USD/MXN exchange rate peaked at 21.28 on February and has now dropped to 20.27. It is consolidating at the 50-day and 25-day moving averages.
Most importantly, the pair has formed a rounded top pattern, a bearish continuation sign. Therefore, the pair will likely continue falling as sellers target the next key support level at 19.84, its lowest point this month. A drop below that level will point to more sell-off ahead.
The Mexican peso may do the opposite of what analysts expect when there is a full-blown trade war with the United States.
Read more: USD/MXN forecast: Mexican peso may rebound despite tariffs
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