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What Is Deflation?

Federal Reserve (Fed) Board of Governors member Adriana Kugler noted on Friday that US growth and economic activity remain healthy overall, but noted that progress toward the Fed's inflation goals has been somewhat lopsided.

Key highlights

In considering appropriate policy rates, we will watch developments, carefully assess data, outlook and risks.

Recent progress on inflation is slow and uneven. Inflation remains elevated.

January jobs report shows the US labor market is healthy, neither weakening nor overheating.

Continued productivity gains would help the Fed attain goals.

The US economy is on a firm footing. I anticipate solid GDP growth in Q1.

US economic activity remains resilient.

A stable labor market gives the Fed time to make decisions.

We're not at 2% inflation; it makes sense to hold rates steady.

Need to see continued slowing of inflation to feel comfortable cutting rates.

The economy is resilient and the labour market is healthy.

The inflation rate has gone sideways and firmed.

It makes sense to hold the policy rate where it is.

The good news is housing inflation came down in Q4.

Source: FXSTREET

Mexican Peso treads water as inflation figures hint at further easing by Banxico.

Despite US payrolls falling short, a lower unemployment rate boosts the USD against the Peso.

Interest rate forecasts suggest further easing in Mexico, with the Fed maintaining a cautious outlook for 2025.

The Mexican Peso (MXN) reversed its course and depreciated against the Greenback on Friday after inflation data in Mexico justified the 50 basis points interest rate cut by Banco de Mexico (Banxico) on Thursday. In the United States (US), job data was mixed, as payrolls missed the mark but the Unemployment Rate edged lower. The USD/MXN trades at 20.60, up 0.86%.

Inflation in Mexico edged lower in January, exceeding estimates revealed by the Instituto Nacional de Estadistica Geografia e Informatica (INEGI). Headline and core inflation remained within the Banxico 3% plus or minus 1% range, and improved compared to the latest report, opening the door for further easing by the Mexican central bank.

On Thursday, Banxico lowered borrowing costs from 10% to 9.50% and hinted that it could lower rates by the same magnitude in further meetings. Banxico’s officials added that inflation would converge to 3% in the third quarter of 2026.

The USD/MXN pair extended its gains after the release of the last US Nonfarm Payrolls report. Although the figures came short of expectations, an improvement in the Unemployment Rate spurred a leg-up in the exotic pair.

Furthermore, the interest rate differential between Mexico and the US will narrow. Banxico is expected to drop the primary reference rate to 8.50%, according to the cCentral bBank’s latest private economist poll. Conversely, the Federal Reserve (Fed) paused its easing cycle and projected two rate cuts in 2025, as revealed by last December’s Summary of Economic Projections (SEP).

Daily digest market movers: Progress on Mexican inflation, weighs on Mexican Peso

Mexico's Consumer Price Index (CPI) for January increased by 3.53% YoY, down from 4.21% the previous month and beneath estimates of 3.61%. Core CPI rose by 3.66% YoY, up from 3.65%, but below forecasts of 3.70%.

The evolution of the disinflation process in Mexico and last quarter's economic contraction of -0.6% QoQ were the main drivers of Banxico’s 50 bps reduction in borrowing costs.

Banxico’s decision was not unanimous, as Deputy Governor Jonathan Heath voted for a 25-bps cut. Currently, the board is split between four doves, and Heath is the only “hawk.”

US Nonfarm Payrolls in January dipped from 256K to 143K, missing the mark of 170K. The Unemployment Rate slid from 4.1% to 4%.

Trade disputes between the US and Mexico remain in the boiler room. Although countries found common ground, USD/MXN traders should know that there is a 30-day pause and that tensions could arise throughout the end of February.

Money market fed funds rate futures are pricing in 39 basis points (bps) of easing by the Federal Reserve in 2025.

USD/MXN technical outlook: Mexican Peso poised for further losses

USD/MXN has consolidated within the 20.30 – 20.70 area for the last four days, following Monday’s volatile session due to Trump’s tariffs on Mexico. The pair remains upward biased, with strong support at the 50-day Simple Moving average (SMA) at 20.57.

If USD/MXN rises past 20.70, the next resistance would be the January 17 daily peak at 20.90 before testing 21.00 and the year-to-date (YTD) high at 21.29.

Conversely, if USD/MXN drops below the 50-day SMA, the next support would be the 100-day SMA at 20.22. Once cleared, further downside is seen, and the pair could challenge 20.00.

Source: FXSTREET

Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee hit markets on an already-volatile Friday with more bad news, noting that inconsistent policy approaches from the US government cause a high level of economic uncertainty that make it difficult for the Fed to draw a bead on where the economy, and inflation specifically, are likely heading. 

Key highlights

This was a solid jobs report.

Tariffs add a little uncertainty.

The potential of escalating trade wars throwing a wrench into supply chains is very real.

I am hopeful, after what we saw recently, that tariffs end up not being a big impediment to trade.

I'm comfortable with path of the economy.

Consumer survey showing jump in near-term inflation expectations is less influential to me.

Wage growth is about consistent with 2% inflation.

Longer-run market-based inflation expectations show the market believes the Fed will get inflation to 2%.

One-time tariff is a transitory shock.

Retaliation would complicate impact of tariffs.

I see the neutral rate a fair bit lower than where we are today.

The Fed are on hold now, but over next 12-18 months, the settling policy rate will be a fair bit below where it is now.

The speed at which rates come down will be slower with more fogginess.

We need to get to settling rate on a judicious timetable.

What's happening in longer-run rates is not our target; that's more the purview of the Treasury.

I think it will take longer than end-2025 to get to neutral policy rate.

I think we are on path to 2% inflation.

I don't think the Fed would play a role in any sovereign wealth fund.

Source: FXSTREET