Mexican Peso rallies as Trump softens tariffs threats

• Mexican Peso gains 0.35%, recovering after Trump's threat of a 25% tariff rattles markets.
• Trump is expected to delay tariffs implementation to March 1, hints at potential exemptions for certain imports.
• Mixed US economic indicators and Fed commentary maintain cautious market sentiment.

The Mexican Peso (MXN) recovered some ground against the US Dollar (USD), rising  0.35% on Friday after posting losses of more than 1% on Thursday on United States (US) President Donald Trump's tariffs rhetoric. At the time of writing, the USD/MXN trades at 20.60 after hitting a daily high of 20.74.

Lately, the main driver of the USD/MXN pair has been US President Trump. On Thursday, he said that 25% tariffs imposed on Mexico would commence on February 1, adding that his decision is justified by the Mexican government's failure to fight drug cartels fentanyl traffic to the US and that his country subsidizes Mexico as the trade deficit grows.

After those remarks, the USD/MXN jumped from around 20.49 to a two-day peak of 20.79 as the market digested Trump's comments. However, Reuters revealed on Friday that Trump has backpedaled as sources said the US would apply new tariffs on Mexico and Canada on March 1. According to Reuters, the White House will announce a process for countries to seek exemptions for certain imports.

Aside from this, the latest US inflation report and the Federal Reserve's (Fed) preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, increased in December as expected, exceeding November's reading. In the twelve months to December, Core PCE remained unchanged compared to the latest figures.

The data comes after the US GDP report for the last quarter was weaker than expected and following the Fed's last monetary policy meeting.

Of note, the Fed parade has begun, as Governor Michelle Bowman and Chicago's Fed President Austan Goolsbee crossed the newswires.

Daily digest market movers: Mexican Peso boosted by Reuters sources article on US tariffs on Mexico

• A Reuters exclusive report revealed that US President Trump is expected to announce new tariffs against Canada and Mexico that will begin March 1.
• "The sources, who asked not to be named because they are not authorized to speak publicly on the matter, said they did not have details on a final tariff rate, but noted Trump has consistently said that he plans to impose a 25% tariff on imports from the two countries on Saturday," said the Reuters report.
• JP Morgan revealed via Reuters that the Mexican Peso could depreciate 11.8% if the US imposes 25% tariffs on Saturday. The US bank said that the "base case" is for tariffs to be postponed.
• The US Core PCE rose by 2.8% YoY in December as expected. Monthly, the underlying inflation rose 0.2%, up from 0.1%
• Fed Governor Michelle Bowman remained hawkish and supported the US Dollar after saying that inflation risks are tilted to the upside. Although she doesn't disregard rate cuts, they would be data-dependent and might be gradual.
• Chicago's Fed President Austan Goolsbee added that he liked December's inflation report and is comfortable that inflation is on the path to the 2% target.
• Money market futures expect the Fed to cut interest rates by 50 bps in 2025, with traders expecting the first move in June.

Technical outlook: Mexican Peso appreciates but clashes with support at 20.50

USD/MXN uptrend is intact despite the ongoing pullback following Reuters source's tariffs news on Mexico. The exotic pair dupped to 20.45 shy of challenging the 50-day Simple Moving Average (SMA) of 20.40 but jumped a sign that sellers were outnumbered by buyers, opening the door to reclaim 20.50.

On further strength, the USD/MXN's next resistance would be the January 28 swing high of 20.77. If that level is taken out, the next resistance would be 21.00, followed by the March 8, 2022, high at 21.46. Conversely, if the exotic pair tumbles below the 50-day SMA, further downside is seen at the 100-day SMA at 20.08, before the 20.00 figure.