• Mexican Peso set for over 1% weekly gain as USD tumbles.
  • The US Dollar Index falls to YTD lows as Fed rate-cut bets increase
  • US Retail Sales drop fuels slowdown fears, boosting Fed easing expectations to 43.5 bps.
  • Banxico minutes, Mexico GDP, and Retail Sales are in focus next week.

The Mexican Peso (MXN) extended its rally on Friday, set to end the week with gains of over 1% against the Greenback. A worse-than-expected Retail Sales report tumbled the US Dollar (USD) to new year-to-date (YTD) lows as depicted by the US Dollar Index (DXY). The USD/MXN pair trades at 20.32, down 0.39%.

United States (US) economic data revealed earlier was the main driver of the session after investors shrugged off reciprocal tariffs not yet enacted by US President Donald Trump. Nevertheless, a dismal January Retail Sales report could increase the chances of a deeper economic slowdown in the United States.

This highlights that Americans are cutting spending due to high interest rates. Henceforth, investors had begun to price in 43.5 basis points of easing by the Federal Reserve (Fed), according to data from the Chicago Board of Trade (CBOT).

The Federal Reserve revealed that Industrial Production improved in January yet failed to halt the Greenback’s plunge during the North American session.

In Mexico, the docket was empty yet. Next week, USD/MXN traders will be watching the release of Retail Sales, Banco de Mexico (Banxico) monetary policy meeting minutes, and Gross Domestic Product (GDP) figures for Q4 2024.

Daily digest market movers: Mexican Peso soars as the Greenback gets battered

  • The deterioration in Mexico's automobile industry and the possibility that the US applies tariffs on cars could weigh on the Mexican economy, which is expected to show a contraction in the last quarter of 2024.
  • Monetary policy divergence between Banxico and the Fed favors further USD/MXN upside, as the Fed would likely hold rates unchanged. At the same time, Banxico targets another 50-basis point rate cut in the next meeting.
  • The US Dollar Index (DXY), which tracks the performance of the buck against a basket of currencies, edged from 107.12 to 106.68, another reason for USD/MXN's downside.
  • On Thursday, US President Donald Trump tasked his economic team with devising plans for reciprocal tariffs on every country taxing US imports.
  • US Retail Sales fell sharply by -0.9% MoM in January, significantly missing expectations of -0.1% and disappointing investors. However, December’s figure was revised higher to a 0.7% increase.
  • Meanwhile, Industrial Production expanded by 0.5% MoM in January, down from December’s 1% growth but surpassing economists’ forecasts of 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.

USD/MXN technical outlook: Mexican Peso surges as USD/MXN drops below 20.50

USD/MXN has fallen below the 50-day Simple Moving Average (SMA) of 20.45, which cleared the path to test the 20.25 area ahead of the 100-day SMA at 20.23. Further downside lies once sellers surpass those levels, with the 20.00 psychological figure. It is worth noting that the losses could drive the exotic pair toward the 200-day SMA at 19.35.

Conversely, if buyers want to regain control, they must clear key resistance levels such as the January 17 high of 20.90, the 21.00 figure, and the year-to-date (YTD) high of 21.29.

Tariffs FAQs

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.

 

Source: Fxstreet