Mexican Peso rallies as US-Mexico tariff pause eases tensions

• Mexican Peso recovered after weakening to an almost three-year low, as US - Mexico pledged to cooperate.
• The US Dollar Index curtails gain post-announcement, supporting a stronger Peso amidst market optimism.
• ISM data shows US business activity improves, while Fed's Collins warns tariffs could inflate prices further.

The Mexican Peso (MXN) recovered some ground after weakening to an almost three-year low of 21.28 against the US Dollar (USD) as United States (US) President Donald Trump and Mexican President Claudia Sheinbaum agreed to pause tariffs for one month as they compromise to cooperate in security and trade. The USD/MXN trades at 20.53, down 0.99%.

Recently, Mexican President Sheinbaum said that she and US President Donald Trump had some conversations, which resulted in a one-month pause on tariffs. The market mood shifted positively after the news broke on Sheinbaum's X account, followed by Trump's statement on his Truth account.

Even though the Mexican Peso took a respite following the news, it would remain adrift to Trump's rhetoric.

Following the news, the US Dollar Index (DXY), which measures the buck's performance against a basket of six currencies, trimmed earlier gains of over 1.27% and is up 0.23% at 108.75. The DXY's fall boosted the Mexican Peso, which has reached a two-day high at 20.41.

On the data front, the Institute for Supply Management (ISM) revealed that business activity in the United States improved in January, while Boston Fed President Susan Collins commented that tariffs "would push up prices across production levels," adding that the Fed needs to do more to lower inflation.

Daily digest market movers: Mexican Peso saved by the bell as Sheinbaum and Trump agreed to terms

• Mexican President Sheinbaum said that Mexico would deploy 10,000 national guards to the border immediately to avoid the trafficking of drugs to the US. She asked US President Trump to work to avoid selling high-powered weapons to Mexico.
• Sheinbaum added that tariffs have been paused for a month now.
• Trump agreed to pause tariffs for one month with Mexico's President immediately. He added that the US would hold negotiations with Mexico headed by Rubio, Bessent, Howard Lutnick, and high-profile Mexican officials.
• The US ISM Manufacturing PMI for January rose to 50.9, surpassing estimates of 49.8 and improved from December's reading of 49.3. The ISM Manufacturing sub-component of prices paid increased from 52.5 to 54.9, indicating higher input costs.
• JP Morgan revealed via Reuters that the Mexican Peso could depreciate 11.8% if the US imposes 25% tariffs. The US bank said that the "base case" is for postponing tariffs.
• Money market futures now price in 46 basis points of Fed rate cuts in 2025, with traders anticipating the first move in June.

Technical outlook: The Mexican Peso appreciates but clashes with support at the 50-day SMA

USD/MXN uptrend remains in place, even though the Peso erased its over 2% losses on Trump's tariffs rhetoric. Since hitting a daily high of 21.29, the exotic pair tumbled towards 20.50, shy of clearing the 50-day Simple Moving Average (SMA) at 20.43.

A breach of the latter will expose the 100-day SMA at 20.14, before challenging the psychological 20.00 mark. Conversely, if USD/MXN rises past the previous year-to-date (YTD) peak of 20.90, a move towards 21.00 is on the cards.