The Mexican peso has posted four consecutive days of gains against the U.S. dollar, with the USD/MXN pair down over 2.6% in that time. This renewed bearish bias is largely the result of easing concerns surrounding the trade war in relation to Mexico. Recent diplomatic progress and Mexico's exclusion from some tariff measures have helped improve market sentiment toward the peso. If these conditions persist, it's likely that selling pressure on USD/MXN will continue to build, making the downward movement more pronounced in the short term.
Mexico Holds Up Against Tariff Pressure
Since March 4, the U.S. has imposed a 25% tariff on most Mexican imports, including 25% on steel and aluminum, 25% on cars and auto parts, and 20% on tomatoes. Despite these measures, Mexico's economy has gradually regained market confidence, partly due to government efforts to navigate the current uncertainty.
In recent weeks, the administration of President Claudia Sheinbaum has succeeded in keeping T-MEC-compliant products exempt from tariffs, which represent a large share of the country’s trade balance. Additionally, Mexico has recently been excluded from the White House’s reciprocal tariffs, following a series of ongoing bilateral negotiations.
This has shifted the focus of the trade war away from Mexico, helping the peso avoid an immediate economic downturn and boosting investor confidence, thereby reinforcing the bearish bias on the USD/MXN daily chart.
That said, it's important to remember that the trade conflict is not over. The U.S. currently maintains 145% tariffs on Chinese goods, with China responding with 125% tariffs on U.S. imports. For now, the spotlight remains on these two global powers, while other countries, including Mexico, benefit from a temporary 90-day pause.
Once this grace period ends, it will be crucial to monitor whether concrete progress is made. If negotiations fail to deliver lasting bilateral agreements, the recent confidence in the Mexican peso could erode quickly, reversing part of the gains seen in recent sessions.
What Is the Position of Banco de México?
On April 10, Banco de México (Banxico) released the minutes of its latest meeting, in which all board members acknowledged that the Mexican economy is gradually slowing. This reinforces expectations that further interest rate cuts could be on the horizon, as part of a more accommodative monetary policy strategy aimed at boosting economic activity.
At its last meeting, Banxico held the benchmark interest rate at 9%, but recent comments suggest that this rate-cutting trend is likely to continue.
By contrast, the Federal Reserve has kept its rate steady at 4.5%, adopting a neutral stance in the short term, with no immediate signs of rate cuts. This reflects a clear divergence in monetary policy between the two central banks.
Source: TradingEconomics
This policy divergence could be decisive going forward. On one side, Banxico maintains a 9% rate but is expected to continue cutting. On the other, the Fed holds steady at 4.5% and shows little urgency for change.
In this context, if U.S. Treasuries continue offering attractive returns with low risk, demand for U.S. dollars could rebound. While Mexico still offers higher yields, perceived risk and expectations of further rate cuts may reduce demand for Mexican debt, eventually weakening interest in the peso.
This monetary divergence could restore strength to the U.S. dollar and trigger renewed upside pressure on USD/MXN, as seen before the current trade war episode that brought significant volatility to global markets.
USD/MXN Technical Outlook
Source: StoneX, Tradingview
- Sideways Channel Under Pressure: The USD/MXN remains in a sideways channel, trading between 20.85 and 20.00 pesos per dollar. Recently, strong selling pressure has pushed the pair toward the lower boundary of the channel once again. If this pressure persists, the market could see a more decisive breakdown, leading to a deeper downtrend.
Still, it's worth noting that the 20 peso level has acted as a strong support zone, holding up against several past attempts at a breakout.
- RSI: The RSI line is currently oscillating near the neutral 50 level, reflecting a balance between buyers and sellers in the short term. As long as it remains in this area, no clear directional trend is expected in the upcoming sessions.
- ADX: The ADX line remains well below the 20 threshold, indicating weak momentum in recent price action. This suggests the market may be consolidating, or that bearish momentum is losing steam. Continued low ADX levels may signal that the pair is building toward a clearer trend.
Key Levels:
- 20.85 – Key Resistance: Marks the upper boundary of the sideways channel. A move back to this level could reignite bullish pressure and restore the upward bias that persisted through much of 2024.
- 20.38 – Near Resistance: Located at the midpoint of the range, in line with the 100-period moving average. Continued trading near this zone may lead to broader consolidation.
- 20.00 – Major Support: This is the lower boundary of the channel. A clear break below this level could invalidate the current neutral structure and open the door to a stronger bearish trend, consistent with the prevailing selling pressure on the daily chart.
Written by Julian Pineda, CFA – Market Analyst
