USD/MXN rises above 21.00 as Trump imposes tariffs on Mexican imports

• USD/MXN appreciates over 2% following Trump's 25% tariffs on Mexican imports, effecting on Tuesday.
• The US also set 25% tariffs on Canadian goods, while Chinese exports would face a 10% tariff.
• The US tariffs reinforce the dovish expectations of Banxico delivering a larger rate cut on Thursday.

USD/MXN hits the week by extending its gains for the third successive session, trading near 21.20 during the Asian hours on Monday. The pair has surged over 2% following US President Donald Trump's decision to impose 25% tariffs on Mexican imports. Set to take effect on Tuesday, the tariffs target concerns such as illegal immigration and fentanyl smuggling. In response, Mexican President Claudia Sheinbaum announced retaliatory tariffs on Saturday, ranging from 5% to 20%.

The US Dollar Index (DXY), which measures the US Dollar's value against six major currencies, rises for the fifth successive day and trades above 109.50 at the time of writing. ISM Manufacturing PMI for January will be eyed later on Monday.

Meanwhile, US inflation data reinforced the Federal Reserve's (Fed) hawkish stance on the monetary policy outlook. The Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, rose 0.3% MoM in December, up from 0.1% in November. On an annual basis, PCE inflation accelerated to 2.6% from the previous 2.4%, while core PCE, which excludes food and energy, remained steady at 2.8% YoY for the third straight month.

The US tariffs along with the economic slowdown reinforce the expectations surrounding the Banco de México (Banxico) to deliver a larger rate cut on Thursday. However, the central bank was expected to lower rates by at least 25 basis points (bps), bringing them down from 10% to 9.75%, though analysts at Capital Economics suggest a 50 bps cut remains a possibility.