During yesterday's session, USD/MXN managed to climb to 21 pesos per dollar, a level not seen since early February. Shortly after this movement, bearish pressure caused the price to drop by more than 2.5% in favor of the Mexican peso, as the market anticipates a possible dialogue on tariffs between the United States and Mexico.
The Role of Tariffs
Several sessions have passed since President Donald Trump first announced his trade plans against countries such as Mexico and Canada. However, as of yesterday's session, the new 25% tariffs on all goods coming from these countries to the United States officially took effect.
The primary reason behind these restrictive measures is the White House's intention to protect the country from drug trafficking while also reducing mass migration at the borders.
Initially, Mexico’s President, Claudia Sheinbaum, announced that the country was prepared to take retaliatory measures against the unjustified tariffs imposed by Trump. These measures were scheduled to take effect on March 9, with the Mexican government maintaining a defensive stance.
However, the initial weakening of the Mexican peso was quickly reversed as new comments from Trump indicated that the White House remains in discussions with Mexico and Canada. He also stated that he is willing to negotiate as long as both countries show commitment.
In its latest statement, the Mexican government mentioned that it expects a temporary pause in retaliatory actions against the United States, as President Sheinbaum is set to meet at the White House this week in an effort to reach an agreement between the two countries.
Investors see this new opportunity for dialogue as a positive factor, as it could help ensure the stability of 85% of Mexico’s exports to the United States and prevent further economic measures against the country. For now, this new development has led to bearish pressure on USD/MXN, and if favorable news emerges from the negotiations, this pressure could continue.
What’s Happening with the Central Banks?
Currently, the Federal Reserve’s interest rate probability table, published by CME Group, still reflects a 91% probability that the central bank will keep rates at 4.5% in March 19. While this is not a surprise to the market, it does reinforce the idea that high interest rates in the United States could remain stable in the coming months.
Source: CMEGroup
When comparing the Fed's rate trend with that of the Bank of Mexico, we can observe that while the United States has maintained a consistent policy stance, Mexico has started to lower its rates, currently dropping below 10%, specifically to 9.5%.
Source: TradingEconomics
This divergence in monetary policy between the two central banks could significantly impact USD/MXN in the long term. If the Fed maintains its aggressive stance while the Bank of Mexico continues to lower rates, investors may continue to see U.S. Treasury bonds as an attractive and safe option for passive investment.
If this expectation holds and the market anticipates further rate cuts in Mexico, demand for U.S. dollars could increase, leading to bullish pressure on USD/MXN, as has already been observed throughout 2024.
USD/MXN Technical Forecast
Source: StoneX, Tradingview
- Lateral Movement Remains Intact: Since November 2024, USD/MXN has traded within a consistent range, with a ceiling at 20.74 pesos per dollar and a floor at 20.11 pesos per dollar. Due to the recent price movements, the pair has entered a zone of indecision, reaching the middle of the sideways range.
As long as price fluctuations remain within this level, it is likely that the sideways range will continue to be the dominant pattern in the market’s upcoming movements.
Technical Indicators Reflect Indecision
- RSI: The RSI line continues to hover near the 50 level, indicating that there is currently an equilibrium between buying and selling pressure. This behavior reinforces a neutral bias in the short term.
- MACD: Both the MACD line and the signal line remain close to the neutral level of 0, and the histogram reflects a constant neutral stance. This suggests that the average movement of recent moving averages has not shown a clear direction, consolidating a period of market indecision.
Both indicators reinforce the lack of clarity in market direction. If this condition persists, the sideways range could strengthen even further in the short term.
Key Levels:
- RSI: The RSI line continues to hover near the 50 level, indicating that there is currently an equilibrium between buying and selling pressure. This behavior reinforces a neutral bias in the short term.
- 20.74: Key resistance. This level represents the highs of the sideways range and aligns with the latest prices reached by the previous uptrend. If the price breaks above this level, it could reactivate the bullish bias, leading to a new short-term uptrend.
- 20.42: Intermediate barrier. Located at the midpoint of the sideways channel, this level coincides with the 50 and 100-period moving averages. It could act as both support and resistance in the coming sessions, but as long as the price continues fluctuating around this level, it will be difficult for USD/MXN to adopt a clear trend.
- 20.11: Key support. This level marks the lower boundary of the current sideways channel and represents USD/MXN’s lowest price levels from December 2024. If the price returns to this zone, it could reinforce the current selling pressure, leading to a more significant downward movement.
Written by Julian Pineda, CFA – Market Analyst
