The Mexican peso has advanced towards the 18 per US dollar mark, approaching its highest level since July 2024. This movement has been influenced by the weakening of the US dollar following the Federal Reserve's decision to reduce interest rates, accompanied by a more cautious outlook for future rate increases. Meanwhile, investors have tempered their expectations regarding the extent and timing of further rate cuts by the Bank of Mexico, in light of recent pricing data. The Federal Reserve's 25-basis point rate cut, along with its strategy to purchase approximately $40 billion in short-term Treasuries, has had the effect of tightening money market conditions and strengthening forecasts for additional easing next year.
Domestically, headline inflation for November exceeded expectations, recording a year-on-year increase of 3.80%, while core inflation accelerated to approximately 4.43% year-on-year. This combination of figures suggests a higher threshold for rapid rate reductions, even as economic growth continues to face challenges. The Bank of Mexico has already reduced rates from their previous peaks but is maintaining a cautious approach, assessing conditions on a meeting-by-meeting basis. This strategy helps to keep Mexican real interest rates relatively appealing when compared to anticipated US levels, thereby supporting peso inflows driven by yield differentials.