USD/MXN Price Annual Forecast: Peso poised for a volatile 2026 after stellar 2025 rally
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UPGRADE- Peso surged nearly 23% in 2025, driven by the US Dollar weakness, carry trade inflows, and resilient domestic fundamentals.
- Banxico easing, possible BoJ hikes, and carry trade unwinding could gradually erode MXN support in 2026.
- USMCA review, tariff threats, and Fed leadership uncertainty pose asymmetric upside risks for USD/MXN volatility.
The Mexican Peso (MXN) has appreciated sharply against the US Dollar (USD) in 2025, poised for a 23% gain amid an environment of trade uncertainty and increasing geopolitical tensions between Mexico and the United States governments. Also, the reduction of interest rate differentials between the Federal Reserve (Fed) and Banco de Mexico (Banxico), failed to underpin the USD/MXN pair, which plunged from around 20.50 at the beginning of the year to 17.88 the last week of 2025, its lowest level since July 2024.
Peso’s performance in 2025: Trump’s tariffs influence, monetary policy and the carry trade
USD/MXN began 2025 steadily between the 20.25-20.93 range in January as the US President Donald Trump began his second term with a raft of executive orders and imposing 25% tariffs on Mexico on February 1. The USD/MXN pair peaked on February 3, with the exotic pair skyrocketing to 21.29, the 2025 high, as the Peso depreciated to its lowest level since March 2022. Nevertheless, the emerging market currency recovered after Mexico’s President Claudia Sheinbaum announced an agreement on immigration and drug trafficking fighting, suspending tariffs on United States-Mexico-Canada Agreement (USMCA) related products.
Since then, the White House has repeatedly imposed and delayed tariffs globally, including Mexico, on what Trump called “Liberation Day” on April 2. After the announcement, the Mexican Peso traded volatile during the whole month before strengthening for the remainder of the year.
The Peso strengthened primarily due to overall US Dollar weakness and the carry trade, a strategy used by investors in which they borrow money in a low-interest-rate country like Japan and use it to buy assets in a country with higher interest rates, like Mexico.
Consequently, the Mexican currency strengthened against the US Dollar. During the year, foreign investors took advantage of higher interest rates in Mexico, with the main reference rate ending at 7% following Banxico's last monetary policy meeting in December, while the Federal Reserve’s fed funds rate stands at 3.50%-3.75%. Therefore, the 325-basis points differential, set to widen as the Fed is expected to continue its easing cycle in 2026, could keep USD/MXN downward pressured.
Mexican Peso expectations for 2026: Mexico and US monetary policy, the carry trade, USMCA revision
Banxico and the Fed are expected to reduce rates, but how much?
In 2025, Banxico reduced rates by 300 basis points from 10% to 7%. During this period, inflation fluctuated between 3.51% and 4.42%, reaching its highest level since November 2024 in May. From mid-2025 to the end of the year, the Consumer Price Index (CPI) remained below 4%, finishing the year at 3.8%, within Banxico's target range of 3% plus or minus 1%.
For 2026, the Mexican central bank is expected to continue easing monetary policy, but it could adjust the pace. In the November monetary policy statement, they said, “Looking ahead, the Board will evaluate reducing the reference rate.” In December, Banxico officials changed the language, noting that, “Looking ahead, the Board will evaluate the timing for additional reference rate adjustments.”
Banxico tweaked its message despite upwardly revised inflation for the first semester of 2026. They expect CPI to remain steady from Q4 2025 to Q1 2026 at 3.5%, followed by a dip to 3.2% in Q2 2026. Then, for Q3 and the remainder of the year, inflation is projected to hit the central bank’s 3% goal.
Banxico Governor Victoria Rodriguez Ceja said that the degree of slack in the national economy and currency appreciation would help mitigate inflationary pressures over the next year. She added that the balance of risks to inflation is lower than that observed between 2021 and 2024.
Governor Rodriguez Ceja said that Peso’s appreciation contributed to lower inflationary pressures, particularly on merchandise prices. Nevertheless, she added that external factors such as monetary policy and financial conditions in the US could contribute to cutting rates in the foreseeable future.
Banxico’s economists' private survey revealed that the median estimate for Mexico’s main interest rate is expected to end at 6.50% in 2026, implying that the central bank has two rate cuts of 25 basis points left. Inflation is projected to end at 3.85% above the 3.75% estimated for 2025. Regarding economic growth, analysts expect a recovery from 0.39% in 2025 to 1.15% in 2026.
Meanwhile, the Federal Reserve reduced rates 75 basis points from 4.25%-4.50% to the 3.50-3.75% range in 2025. For the next year, money markets have priced in 52 basis points of easing towards the year’s end.
However, everything could change, as US President Donald Trump is expected to nominate a replacement for Fed Chair Jerome Powell in January. If he chooses Kevin Hassett, the financial markets have already reacted negatively to his name when Trump called him a “potential Fed Chair.” The US Dollar plunged on expectations that Hassett taking the top job at the Fed would mean further rate cuts are expected, due to his closeness to US President Donald Trump. Conversely, if Trump chooses the former Fed Governor Kevin Warsh or the current Fed Governor Christopher Waller, this would mean that the US central bank independence is not at a higher risk than with Hassett.
Unwinding of the carry trade, its impact on the Mexican Peso
Banxico Governor Victoria Rodriguez Ceja mentioned that one of the reasons for the Peso’s appreciation is the ongoing carry trade. Although the Mexican central bank has been cutting rates, the interest rate spread of 325 basis points against the Fed remains attractive for US investors.
But the carry trade is usually funded with a currency with lower interest rates, like the Japanese Yen. The Bank of Japan (BoJ) has kept rates lower, but in December, it raised rates by 25 basis points to 0.75%. Although Mexico’s main reference interest rate is at 7% and the interest rate spread with Japan is 6.25%, expectations that the BoJ could continue its hiking cycle next year increased the chances for an unwinding of the carry trade.
For 2025, Banxico is projected to cut rates 0.50% to 6.50%, according to economists. Regarding the BoJ, money markets had priced in 45 basis points of rate hikes for next year, implying that the interest rate differential would reduce by 100 bps to 5.25%.
Therefore, if the Bank of Japan adopts a more hawkish stance than expected in the first half of 2026—meaning it raises interest rates and makes Japanese assets more attractive—investors may shift funds away from emerging markets such as Mexico. This could lead to a depreciation of the Mexican Peso and reduce carry trade gains due to increased foreign exchange volatility.
The USMCA free trade agreement revision
The United States-Mexico-Canada agreement will undergo a formal review in the summer of 2026. Given Trump administration's history of imposing tariffs worldwide, negotiations between the three countries are expected to be harsh. The White House is expected to seek additional concessions from Mexico, particularly on migration, drug trafficking and trade disputes.
The top priority for US negotiators is to enforce the Rules of Origin, in order to prevent Chinese companies from using Mexico as a proxy to enter the US markets free of duties. Alongside this, they will eye the resolution of labor and energy disputes. In addition to this, Trump’s trade rhetoric and threats against Mexico ahead of the beginning of the USMCA discussion is expected to weigh on the Mexican Peso and push the USD/MXN pair higher.
Water and tariffs of 5%
Mexico and the United States have reached an understanding under the Water Treaty to circumvent the proposed 5% tariff put forth by Donald Trump. As part of this agreement, Mexico will release 249.16 million cubic meters of water commencing the week of December 15. Both nations reiterated their commitment to the 1944 Treaty and agreed to establish a definitive plan by January 31, 2026.
USD/MXN Technical Outlook: Further downside expected, sellers target 2024 yearly low
The USD/MXN technical picture from a weekly chart perspective suggests that the downtrend is set to continue, after breaking below the confluence of the 100- and the 200-week Simple Moving Average (SMA) at around 18.82-18.75, respectively, clearing the path to fall below 18.50, extending its losses beneath the 18.00 figure.
Momentum favors sellers as depicted by the Relative Strength Index (RSI), which remains in bearish territory, with enough room before turning oversold, an invitation for Mexican Peso bulls to push the USD/MXN pair lower.
Although a bearish divergence looms, with the RSI printing higher lows while price action registering lower lows, the pair seems poised to challenge the July 2024 low of 17.60, before challenging the 17.00 milestone. A breach of the latter would expose the 2024 yearly low of 16.26.
On the other hand, if buyers drive USD/MXN above 18.00, they could challenge 18.50 ahead of the confluence of technical resistance levels at around 18.75-18.82. If those levels are taken, the next resistance would be the 19.00 figure, ahead of the 50-week SMA at 19.15.
Conclusion
For 2026, the Mexican Peso enters the year from a position of strength, but its outlook is set to become more complex. While supportive fundamentals—such as still-attractive interest rate differentials, relatively contained inflation and a technically bearish USD/MXN structure—could extend Peso resilience early in the year, the balance of risks is shifting. Gradual monetary easing by Banxico, the potential normalization of monetary policy by the Bank of Japan and the risk of an unwinding carry trade suggest that the forces that powered the Peso’s outsized gains in 2025 may fade over time.
At the same time, political and trade-related uncertainty is likely to re-emerge as a dominant driver. The USMCA review renewed tariff threats, and the use of trade policy as leverage by the White House introduce tail risks that could periodically pressure the Mexican Peso, especially during negotiation milestones. On the US side, uncertainty around Federal Reserve leadership and the trajectory of US interest rate policy adds another layer of volatility to the USD/MXN outlook.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
- Peso surged nearly 23% in 2025, driven by the US Dollar weakness, carry trade inflows, and resilient domestic fundamentals.
- Banxico easing, possible BoJ hikes, and carry trade unwinding could gradually erode MXN support in 2026.
- USMCA review, tariff threats, and Fed leadership uncertainty pose asymmetric upside risks for USD/MXN volatility.
The Mexican Peso (MXN) has appreciated sharply against the US Dollar (USD) in 2025, poised for a 23% gain amid an environment of trade uncertainty and increasing geopolitical tensions between Mexico and the United States governments. Also, the reduction of interest rate differentials between the Federal Reserve (Fed) and Banco de Mexico (Banxico), failed to underpin the USD/MXN pair, which plunged from around 20.50 at the beginning of the year to 17.88 the last week of 2025, its lowest level since July 2024.
Peso’s performance in 2025: Trump’s tariffs influence, monetary policy and the carry trade
USD/MXN began 2025 steadily between the 20.25-20.93 range in January as the US President Donald Trump began his second term with a raft of executive orders and imposing 25% tariffs on Mexico on February 1. The USD/MXN pair peaked on February 3, with the exotic pair skyrocketing to 21.29, the 2025 high, as the Peso depreciated to its lowest level since March 2022. Nevertheless, the emerging market currency recovered after Mexico’s President Claudia Sheinbaum announced an agreement on immigration and drug trafficking fighting, suspending tariffs on United States-Mexico-Canada Agreement (USMCA) related products.
Since then, the White House has repeatedly imposed and delayed tariffs globally, including Mexico, on what Trump called “Liberation Day” on April 2. After the announcement, the Mexican Peso traded volatile during the whole month before strengthening for the remainder of the year.
The Peso strengthened primarily due to overall US Dollar weakness and the carry trade, a strategy used by investors in which they borrow money in a low-interest-rate country like Japan and use it to buy assets in a country with higher interest rates, like Mexico.
Consequently, the Mexican currency strengthened against the US Dollar. During the year, foreign investors took advantage of higher interest rates in Mexico, with the main reference rate ending at 7% following Banxico's last monetary policy meeting in December, while the Federal Reserve’s fed funds rate stands at 3.50%-3.75%. Therefore, the 325-basis points differential, set to widen as the Fed is expected to continue its easing cycle in 2026, could keep USD/MXN downward pressured.
Mexican Peso expectations for 2026: Mexico and US monetary policy, the carry trade, USMCA revision
Banxico and the Fed are expected to reduce rates, but how much?
In 2025, Banxico reduced rates by 300 basis points from 10% to 7%. During this period, inflation fluctuated between 3.51% and 4.42%, reaching its highest level since November 2024 in May. From mid-2025 to the end of the year, the Consumer Price Index (CPI) remained below 4%, finishing the year at 3.8%, within Banxico's target range of 3% plus or minus 1%.
For 2026, the Mexican central bank is expected to continue easing monetary policy, but it could adjust the pace. In the November monetary policy statement, they said, “Looking ahead, the Board will evaluate reducing the reference rate.” In December, Banxico officials changed the language, noting that, “Looking ahead, the Board will evaluate the timing for additional reference rate adjustments.”
Banxico tweaked its message despite upwardly revised inflation for the first semester of 2026. They expect CPI to remain steady from Q4 2025 to Q1 2026 at 3.5%, followed by a dip to 3.2% in Q2 2026. Then, for Q3 and the remainder of the year, inflation is projected to hit the central bank’s 3% goal.
Banxico Governor Victoria Rodriguez Ceja said that the degree of slack in the national economy and currency appreciation would help mitigate inflationary pressures over the next year. She added that the balance of risks to inflation is lower than that observed between 2021 and 2024.
Governor Rodriguez Ceja said that Peso’s appreciation contributed to lower inflationary pressures, particularly on merchandise prices. Nevertheless, she added that external factors such as monetary policy and financial conditions in the US could contribute to cutting rates in the foreseeable future.
Banxico’s economists' private survey revealed that the median estimate for Mexico’s main interest rate is expected to end at 6.50% in 2026, implying that the central bank has two rate cuts of 25 basis points left. Inflation is projected to end at 3.85% above the 3.75% estimated for 2025. Regarding economic growth, analysts expect a recovery from 0.39% in 2025 to 1.15% in 2026.
Meanwhile, the Federal Reserve reduced rates 75 basis points from 4.25%-4.50% to the 3.50-3.75% range in 2025. For the next year, money markets have priced in 52 basis points of easing towards the year’s end.
However, everything could change, as US President Donald Trump is expected to nominate a replacement for Fed Chair Jerome Powell in January. If he chooses Kevin Hassett, the financial markets have already reacted negatively to his name when Trump called him a “potential Fed Chair.” The US Dollar plunged on expectations that Hassett taking the top job at the Fed would mean further rate cuts are expected, due to his closeness to US President Donald Trump. Conversely, if Trump chooses the former Fed Governor Kevin Warsh or the current Fed Governor Christopher Waller, this would mean that the US central bank independence is not at a higher risk than with Hassett.
Unwinding of the carry trade, its impact on the Mexican Peso
Banxico Governor Victoria Rodriguez Ceja mentioned that one of the reasons for the Peso’s appreciation is the ongoing carry trade. Although the Mexican central bank has been cutting rates, the interest rate spread of 325 basis points against the Fed remains attractive for US investors.
But the carry trade is usually funded with a currency with lower interest rates, like the Japanese Yen. The Bank of Japan (BoJ) has kept rates lower, but in December, it raised rates by 25 basis points to 0.75%. Although Mexico’s main reference interest rate is at 7% and the interest rate spread with Japan is 6.25%, expectations that the BoJ could continue its hiking cycle next year increased the chances for an unwinding of the carry trade.
For 2025, Banxico is projected to cut rates 0.50% to 6.50%, according to economists. Regarding the BoJ, money markets had priced in 45 basis points of rate hikes for next year, implying that the interest rate differential would reduce by 100 bps to 5.25%.
Therefore, if the Bank of Japan adopts a more hawkish stance than expected in the first half of 2026—meaning it raises interest rates and makes Japanese assets more attractive—investors may shift funds away from emerging markets such as Mexico. This could lead to a depreciation of the Mexican Peso and reduce carry trade gains due to increased foreign exchange volatility.
The USMCA free trade agreement revision
The United States-Mexico-Canada agreement will undergo a formal review in the summer of 2026. Given Trump administration's history of imposing tariffs worldwide, negotiations between the three countries are expected to be harsh. The White House is expected to seek additional concessions from Mexico, particularly on migration, drug trafficking and trade disputes.
The top priority for US negotiators is to enforce the Rules of Origin, in order to prevent Chinese companies from using Mexico as a proxy to enter the US markets free of duties. Alongside this, they will eye the resolution of labor and energy disputes. In addition to this, Trump’s trade rhetoric and threats against Mexico ahead of the beginning of the USMCA discussion is expected to weigh on the Mexican Peso and push the USD/MXN pair higher.
Water and tariffs of 5%
Mexico and the United States have reached an understanding under the Water Treaty to circumvent the proposed 5% tariff put forth by Donald Trump. As part of this agreement, Mexico will release 249.16 million cubic meters of water commencing the week of December 15. Both nations reiterated their commitment to the 1944 Treaty and agreed to establish a definitive plan by January 31, 2026.
USD/MXN Technical Outlook: Further downside expected, sellers target 2024 yearly low
The USD/MXN technical picture from a weekly chart perspective suggests that the downtrend is set to continue, after breaking below the confluence of the 100- and the 200-week Simple Moving Average (SMA) at around 18.82-18.75, respectively, clearing the path to fall below 18.50, extending its losses beneath the 18.00 figure.
Momentum favors sellers as depicted by the Relative Strength Index (RSI), which remains in bearish territory, with enough room before turning oversold, an invitation for Mexican Peso bulls to push the USD/MXN pair lower.
Although a bearish divergence looms, with the RSI printing higher lows while price action registering lower lows, the pair seems poised to challenge the July 2024 low of 17.60, before challenging the 17.00 milestone. A breach of the latter would expose the 2024 yearly low of 16.26.
On the other hand, if buyers drive USD/MXN above 18.00, they could challenge 18.50 ahead of the confluence of technical resistance levels at around 18.75-18.82. If those levels are taken, the next resistance would be the 19.00 figure, ahead of the 50-week SMA at 19.15.
Conclusion
For 2026, the Mexican Peso enters the year from a position of strength, but its outlook is set to become more complex. While supportive fundamentals—such as still-attractive interest rate differentials, relatively contained inflation and a technically bearish USD/MXN structure—could extend Peso resilience early in the year, the balance of risks is shifting. Gradual monetary easing by Banxico, the potential normalization of monetary policy by the Bank of Japan and the risk of an unwinding carry trade suggest that the forces that powered the Peso’s outsized gains in 2025 may fade over time.
At the same time, political and trade-related uncertainty is likely to re-emerge as a dominant driver. The USMCA review renewed tariff threats, and the use of trade policy as leverage by the White House introduce tail risks that could periodically pressure the Mexican Peso, especially during negotiation milestones. On the US side, uncertainty around Federal Reserve leadership and the trajectory of US interest rate policy adds another layer of volatility to the USD/MXN outlook.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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