Mexican Peso Steady on Dovish Fed Expectations

The Mexican peso traded little changed at 17.5 per USD in July as broad US dollar weakness was offset by uncertainty surrounding the USMCA review. The dollar came under pressure after weaker-than-expected US nonfarm payrolls data for June reduced expectations of additional Federal Reserve rate hikes. The return of oil prices to pre-conflict levels also eased concerns about energy-driven inflation, reinforcing expectations that the Fed could remain on hold through year-end. Meanwhile, uncertainty surrounding negotiations to revise the USMCA continued to weigh on the economic outlook and reduced prospects for future rate hikes. Also, domestic data strengthened the case for dovish policymakers at Banxico. Mexico's annual headline inflation fell more than expected to a ten-month low of 3.55% in the first half of June, while core inflation also eased by more than forecast, supporting expectations of lower interest rates.

The Mexican peso fell to 17.6 per USD in late June, the weakest since early April, amid contrasting outlooks for the Bank of Mexico and the Federal Reserve. The dollar surged against G10 and emerging market currencies after hawkish projections by FOMC members in their latest rate decision drove markets to position for more than one rate hike by the central bank this year. Conversely, the latest economic data weakened the argument for dovish policymakers at Banxico. The domestic headline inflation rate fell more than expected to a ten-month low of 3.55% in the first half of June, while the core rate also eased more than forecasted. Besides loosening policy domestically, a narrower rate differential between both central banks would decrease demand for peso-denominated carry trades.

The MXN traded near 17.3 per USD in June following the Federal Reserve's latest policy announcement. The move reflected the hawkish tone of the FOMC's updated economic projections. In its first meeting under Chair Kevin Warsh, the Fed left interest rates unchanged, but the dot plot showed that at least nine members expect rate hikes this year. Markets are now increasingly pricing in a 25-basis-point increase before the end of 2026. Given the close link between Fed policy and Banxico, a more hawkish Fed could narrow the interest-rate differential after Mexico's central bank signaled it would pause its easing cycle. This has weighed on the peso by reducing the appeal of carry trades. Meanwhile, recent data showed that Mexico's economy contracted 0.6% quarter-on-quarter in the first quarter while expanding just 0.2% from a year earlier. Inflation also slowed more than expected in the first half of May, although it remained above the central bank's target, with annual CPI easing to 4.1%.