Mexican Peso gains as Banxico cuts rates, following Fed’s lead

Mexican Peso advances as Banco de Mexico reduces rates in line with forecasts.
Banxico reduced the main reference rate to 10%, highlighting Q3 economic growth and inflation to reach the target in Q3 2026.
USD/MXN set for uncertainty as Fed's hawkish cut contrasts with Banxico’s aggressive easing.

The Mexican Peso strengthened against the US Dollar on Thursday after the Banco de Mexico reduced interest rates as expected following the Federal Reserve’s (Fed) Wednesday decision. At the time of writing, USD/MXN trades near 20.32, down 0.17%.

Banxico unanimously decided to reduce the main reference rate by 25 basis points (bps) to 10.00%, as widely expected by analysts. The central bank added that the balance of risks to growth is tilted to the downside, though the economy expanded at a greater pace in Q3 2024.

Headline and core inflation decreased between November and December, with expectations for 2024 revised downwards. Those for the end of 2025 and the longer-term remained unchanged, and Banxico expects the Consumer Price Index (CPI) to converge to the bank’s 3% goal in Q3 2026.

Banxico’s Governing Board noted that imposing tariffs on US imports from Mexico added uncertainty to the projections. Nevertheless, the bank noted, "The inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.”

In the US, the economic docket revealed that the economy grew healthier, exceeding estimates and Q2’s reading, while the number of Americans filing for unemployment benefits dipped.

On Wednesday, the Fed adopted a less dovish stance despite cutting interest rates by 25 basis points (bps), though not unanimously. Fed Chair Jerome Powell hinted that the central bank had shifted slightly more attention to inflation, as seen by the dot plot, with most officials eyeing 50 basis points of easing for 2025.

This week, the Mexican economic docket is absent, while in the US, the release of the core Personal Consumption Expenditures Price Index and the University of Michigan (UoM) Consumer Sentiment poll will occur.

Daily digest market movers: Mexican Peso climbs as USD/MXN drops below 20.35

Banxico estimates headline inflation would end 2024 at 4.6%, 2025 at 3.3%, and hit the 3% goal in Q3 2026. Core inflation is projected to end the current year at 3.6%, 2025 at 3.3%, and will hit 3% in Q2 2026.
Banxico's December private sector survey forecasts Mexico's inflation to close 2024 at 4.37%, with core inflation easing to 3.60%, down from November’s 3.69%. Economic growth is expected at 1.60%, up from the previous 1.53%, while the USD/MXN exchange rate is projected at 20.25.
For 2025, inflation is expected to decline to 3.80%, while core inflation is projected to rise slightly to 3.72%. GDP growth is forecast at 1.12%, lower than November’s 1.20% estimate, and the USD/MXN exchange rate is anticipated to reach 20.53.
US Initial Jobless Claims for the week ending December 14 fell to 220K from 242K, beating expectations of 230K and signaling continued strength in the labor market.
The US economy grew at an annual rate of 3.1% in Q3, surpassing the 2.8% forecast and slightly higher than the 3% growth in Q2.

USD/MXN technical outlook: Mexican Peso climbs as USD/MXN drops to 20.30

The USD/MXN uptrend remains in place, though it has halted as the Mexican currency appreciates. The exotic pair has failed to clear the 20.50 figure decisively, and it might be set to end the year at around the 20.00-20.50 range as liquidity begins to drain.

If sellers push the USD/MXN below the 50-day Simple Moving Average (SMA) at 20.13, the next support would be the 20.00 psychological figure. A breach of the latter will expose the 100-day SMA at 19.75, before challenging 19.50. For a bullish continuation, buyers must clear 20.20 before testing 20.50. On further strength, the next resistance would be the December 2 daily high of 20.59, followed by the year-to-date peak of 20.82 and the 21.00 mark.

Banxico FAQs

What is the Bank of Mexico?

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

How does the Bank of Mexico’s monetary policy influence the Mexican Peso?

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

How often does the Bank of Mexico meet during the year?

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.