Mexican Peso defies US inflation shock, extends gains

• Mexican Peso shrugs off hot US inflation, Fed's rate-cut hopes dwindle
• US inflation jumps past 3%, delaying Fed rate-cut expectations until September.
• Fed Chair Powell signals restrictive policy will persist as core prices remain strong.
• MXN gains despite lack of local economic data; Mexico-US steel tariff talks ahead.

The Mexican Peso (MXN) extended its gains against the US Dollar (USD) for the second consecutive day, unfazed by the jump in inflation in the United States (US), preventing the Federal Reserve (Fed) from easing policy. The USD/MXN pair trades at 20.51, down 0.14%.

The Consumer Price Index (CPI) in January jumped above the 3% YoY threshold for the first time in six months, indicating that the Fed's job of tackling inflation is not done, as shown by US Bureau of Labor Statistics (BLS) data. Core prices also increased, justifying the Fed's decision to hold rates at the January meeting.

After the US CPI release, the swaps market speculated that the Fed would not cut rates until the September meeting. December's fed funds rate futures contract shows the market is pricing 29.5 basis points (bps) of easing towards the end of the year.

Meanwhile, Fed Chair Jerome Powell testified against the US House of Representatives. He commented that core prices remain strong and that the Fed must wait to see monetary policy's effects. Powell acknowledged that the job on inflation was not done and wanted to keep policy restrictive.

The economic docket remains absent in Mexico, yet President Claudia Sheinbaum said that Mexico and the US will discuss steel tariffs later this week. In the US, the schedule will feature the release of the Producer Price Index (PPI), Initial Jobless Claims, Retail Sales, and Industrial Production.

Daily digest market movers: Mexican Peso ignores US inflation data

• Mexico's economic docket remains absent, yet deterioration in the automobile industry and worse-than-expected Industrial Production figures hint the economy is in worse shape than expected.
• This and US President Donald Trump's trade rhetoric on Mexico would be headwinds for the Mexican currency.
• The Consumer Price Index (CPI) surpassed 3% YoY for the first time since June 2024, with the month-over-month (MoM) figures increasing by 0.5%, up from December's 0.4%.
• Excluding volatile items, the core CPI rose by 3.3% YoY from 3.2%, and monthly, it expanded by 0.4%, an increase from the previous 0.2% and exceeding the estimated 0.3%.
• Trade disputes between the US and Mexico remain in the boiler room. Although the countries found common ground previously, USD/MXN traders should know that there is a 30-day pause and that tensions could arise toward the end of February.
• Money market fed funds rate futures are pricing in 28.5 basis points (bps) of easing by the Fed in 2025.

USD/MXN technical outlook: Mexican Peso consolidates, awaiting fresh catalyst

USD/MXN has fallen toward the 50-day Simple Moving Average (SMA) at 20.46, which, if broken, could pave the way for a retracement. Price action suggests the exotic pair has consolidated near the 20.40 - 20.68 area during the last five days, with momentum slightly tilted to the downside as the Relative Strength Index (RSI) turned bearish.

A drop of USD/MXN below 20.40 would favor a test of the 100-day SMA at 20.22, exposing the critical 20.00 figure. If surpassed, the exotic pair could aim toward 19.50 and eye a test of the 200-day SMA at 19.26.

In the meantime, if buyers clear 20.68, the next resistance would be the January 17 high at 20.90. Once surpassed, the next stop would be 21.00, followed by the year-to-date (YTD) at 21.29.