USD/MXN Outlook: The Mexican Peso Retreats Due to Tariff Threats

It has been a challenging start to the week for the Mexican peso, as USD/MXN has risen by more than 1.5%, favoring the U.S. dollar in the short term. The increasing bullish momentum has stabilized significantly after growing threats of tariffs from the United States.

Trump Gets Serious

President Trump has decided to impose new tariffs of around 25% on Mexico and Canada, a measure that will take effect on the first of February. Additionally, a stricter review of the current trade agreement between the United States and both countries is expected, aiming to favor the U.S. economy more heavily. In response, President Claudia Sheinbaum has urged calm and prudence in relations with the White House, assuring that the Mexican government is working on strategies to address the new measures announced by Trump.

However, the uncertainty created in the market is evident. There is a genuine concern that these new tariffs could severely impact Mexican exports, as the country's products could become less competitive compared to U.S. domestic products. This has placed the peso in a risk zone, pushing investors toward the U.S. dollar in search of short-term stability.

What likely added weight to these tariff threats was the incident on Sunday between Colombia and the United States. Initially, the Colombian government refused to accept planes carrying deported individuals, prompting a strong reaction from President Trump. He threatened to impose new tariffs of up to 50% if U.S. demands were not met. Although the situation was resolved that same evening, it set a precedent for how seriously the U.S. government might act if its demands are not fulfilled. This precedent has heightened expectations that the announced tariffs for Mexico and Canada could materialize, strengthening the bearish outlook for the Mexican peso.

Central Banks

The market is also awaiting the Federal Reserve's decision on January 29. According to the CME Group, there is a 97.3% probability that the interest rate will remain at the current level of 4.5% for the United States. However, it is likely that recent comments from Trump have increased inflation expectations for the coming months, which could lead Federal Reserve Chair Jerome Powell to adopt a more neutral stance on future interest rate cuts.

Interest Rate Probability for January – CME Group

Source: CME Group

The interest rate differential continues to favor Mexico in the short term, with a 10% rate compared to the 4.5% in the United States. However, recent economic threats against Mexico have shifted the balance toward U.S. fixed-income products, which offer greater stability. This could help sustain the bearish bias for the Mexican peso in the coming sessions.

USD/MXN Technical Forecast

Source: StoneX, Tradingview

• Lateral Range: The price of USD/MXN continues to fluctuate within a consistent range between the resistance at 20.73 pesos per dollar and the support at 20.11 pesos per dollar. Due to recent events, the price shows strong bullish momentum as it attempts to break through the current resistance zone. If buying pressure remains constant, it could break the lateral range and resume the previous bullish trend.

   

• RSI: The RSI line has started to slope upward, crossing the neutral level of 50. This indicates that, on average, bullish movements have begun to dominate USD/MXN. If the RSI line continues to approach the overbought level at 70, bearish pressure on the Mexican peso could intensify in the short term.

   

  Key Levels:

   

• 20.73: This is an important resistance zone. A break above this level could generate new highs and reactivate the bullish trend that was in place before the current lateral range.

   

• 20.11: This is a nearby support level, coinciding with the 50-period moving average and the lower Bollinger Band. Oscillations near this level could restore strength to the Mexican peso and extend the current lateral formation.

Written by Julian Pineda, CFA – Market Analyst