Mexican Peso sinks as Fed holds rates, USD/MXN tops 20.00
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Christian Borjon Valencia
webinar date
19 Mar @ 05:11 (GMT+0)

Mexican Peso sinks as Fed holds rates, USD/MXN tops 20.00

  • Mexican Peso tumbles 0.63% as traders digest Fed’s cautious outlook and economic risks.
  • USD/MXN climbs to 20.04, as the Fed keeps rates steady but signals economic uncertainty and slower balance sheet runoff.
  • Fed projections hint at two rate cuts in 2025, with inflation and unemployment revised higher amid Trump’s trade policies.
  • Banxico's next move in focus; Mexico’s Aggregate Demand and Private Spending data are due Thursday.

The Mexican Peso (MXN) tumbled against the US Dollar (USD) late in the North American session as market players digested the US Federal Open Market Committee’s (FOMC) monetary policy decision to hold rates amid an uncertain economic outlook. At the time of writing, the USD/MXN trades at 20.04, up 0.63%.

The Federal Reserve (Fed) held interest rates steady at 4.25%-4.50% and announced plans to slow the pace of its balance sheet runoff starting in April. The Fed reaffirmed that labor market conditions remain solid, though inflation remains "somewhat" elevated, emphasizing its commitment to monitoring risks on both sides of its dual mandate.

The Summary of Economic Projections (SEP) hinted that officials expect two rate cuts in 2025, with the fed funds rate forecast remaining at 3.9%, unchanged from December’s projections. However, inflation and the unemployment rate were revised higher, while GDP growth is now expected to dip below 2%, reflecting a slightly more fragile U.S. economy amid President Donald Trump’s trade policies.

After the Fed’s decision, Chair Jerome Powell acknowledged that economic uncertainty has increased, noting that some tariff-driven inflation has been passed on to consumers. Powell stated, "Our current policy stance is well positioned to deal with the risk and uncertainties we face."

On Thursday, Mexico’s economic docket will feature the release of Aggregate Demand and Private Spending data. The data could shed some light on current economic conditions and give some cues about Banco de Mexico’s (Banxico) next policy move in the March 27 monetary policy meeting.

Dail digest market movers: Mexican Peso on the defensive amid strong US Dollar

  • The Organization for Economic Cooperation and Development (OECD) revealed earlier this week that US tariffs on Mexican products could spur a recession in Mexico. If duties remain unchanged, the OECD projects Mexico’s economy would shrink -1.3% in 2025 and -0.6% in 2026.
  • Last Wednesday, Mexican Finance Minister Edgar Amador Zamora said the national economy is expanding but is showing signs of slowing down due to trade tensions with the US.
  • Traders had priced the Fed to ease policy by 57 basis points (bps) throughout the year. Nevertheless, President Donald Trump's inflation-prone US trade policies could prevent the US central bank from continuing its cutting rates cycle and waiting to assess the impact on the economy.
  • So far, an Atlanta Fed model updated on March 18 shows that the Gross Domestic Product (GDP) is expected to contract -1.8% in Q1 2025.

USD/MXN technical outlook: Mexican Peso retreats as USD/MXN climbs above 20.00

USD/MXN seems to have bottomed near the 19.89–20.00 range as traders await a fresh catalyst. A hawkish tilt by the Fed could refresh weekly highs and clear the path to challenging the 100-day Simple Moving Average (SMA) at 20.35. If surpassed, the next stop would be the 50-day SMA at 20.42.

Conversely, if USD/MXN tumbles beneath 19.90, traders could expect a fall to test the 200-day Simple Moving Average (SMA) at 19.65. Once hurdled, the next key support levels would be 19.50, 19.00, and the August 20, 2024 low at 18.64.

Banxico FAQs

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%.

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.

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.