By The USD/MXN exchange rate will be on the spotlight this week as investors watched the happenings in the US and Mexico. The pair ended last week at 20.67, where it has remained in the past few days.
US and Mexico tariffs
The USD/MXN pair wavered after Donald Trump threatened sweeping tariffs on Mexican goods that will have a big impact on the two economies.
In an X post, Trump announced that his administration would impose a 25% tariff on imported goods from Mexico. Meanwhile, Mexico said it would introduce new tariffs and non-tariff responses to the new measures.
These tariffs will hurt the two countries. US will experience higher inflation, which will push the Federal Reserve to maintain a hawkish tone.
On the other hand, the Mexican economy may go through some volatility and even a recession and crash the peso.
The US and Mexico are some of the top trading partners globally, handling over $1.5 trillion worth of trade in 2024. The US exported goods worth $309 billion to Mexico, while the US imported goods worth $466 billion.
Mexico sells more goods to the US because of the low cost of doing business there than in the US. For example, the US has a minimum wage of $7.25 an hour, while Mexico’s one stands at 278.80 pesos a day or $20.
Therefore, many companies will opt to do business in Mexico and then ship them to the US and boost prices.
On the positive side, Donald Trump may want to cut a deal soon, which explains why he planned to launch the tariffs on Tuesday.
Trump’s tariff threat on Mexico also risks undoing the progress made in terms of immigration. A weaker Mexican economy will lead to a higher unemployment rate and more migration from the country to the US.
Additionally, Mexico may decide to focus on other areas of the economy instead on enforcing migration issues. Recently, the government has put in place more measures to prevent and reduce illegal migration, and stop drug trafficking.
Federal Reserve and Banxico rates
The USD/MXN pair is also reacting to the Federal Reserve and Banxico divergence. In its first interest rate decision, the Fed left interest rates unchanged at 4.25% and 4.50% and maintained a hawkish tone.
Economists expect that the Fed will maintain higher rates for a while because of the rising inflation rate in the country. The upcoming tariffs will worsen the state of inflation in the country.
Mexico, on the other hand, has adopted a more dovish tone in the past few months. It has already cut four interest rates, and analysts expect a further cut later this month.
USD/MXN technical analysis
USD/MXN chart by TradingView
The USD/MXN exchange rate peaked at 20.92 on January 17 and then retreated to the current 20.67. It has remained above the 50-day and 25-day Exponential Moving Averages (EMA).
However, there are signs that it may stage a strong bearish breakdown in the coming weeks. For one, the Trump tariffs have been priced in by market participants.
The pair has formed a rising wedge pattern, a popular bearish chart pattern. The MACD and the Relative Strength Index (RSI) have formed bearish divergence patterns.
Therefore, the pair may have a breakdown soon, with the next point to watch being at 20.
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