In January, Mexico’s core inflation slightly surpassed expectations. Forecasted at 0.59%, the actual figure reached 0.6%.
This small increase suggests continued pressures within the economy. Core inflation excludes volatile items like food and energy, making it a key indicator of underlying price trends.
Monetary Policy Influence
The data released could influence monetary policy decisions. Analysts closely monitor such figures to gauge economic health and future movements.
Mexico’s central bank sets interest rates based on inflation trends. Persistent deviations from forecasts may prompt policy adjustments to stabilise inflation.
This higher-than-expected core inflation print is a hawkish signal for the Bank of Mexico. It suggests underlying price pressures are more persistent than we anticipated. This development significantly reduces the probability of an interest rate cut in the near future.
We should therefore anticipate renewed strength in the Mexican peso over the coming weeks. The primary trade is to position for a lower USD/MXN exchange rate. Consider selling near-term futures contracts or buying put options on USD/MXN to capitalize on this view.
Interest Rate Swap Curve Impact
This data point is especially important given Banxico just held its overnight rate at 10.50% in its late January meeting. The market had been pricing in a potential first cut in the second quarter, but this report pushes that expectation further out, much like we saw in the third quarter of 2025 when similar data delayed a policy pivot. Today, fed funds futures are pricing in only a 15% chance of a Banxico cut before June, down from 40% last week.
We should also look at the TIIE interest rate swap curve. The expectation that rates will remain higher for longer should put upward pressure on the front end of the curve. Entering trades to receive the fixed rate on 3-month and 6-month TIIE swaps is a direct way to express this view.
Expect implied volatility in the peso to increase following this surprise. One-month implied volatility on USD/MXN has already ticked up from 11.5% to 12.8% in the hours following the release. This makes buying options, such as straddles, an attractive strategy to trade the likelihood of larger price swings.
The profitable carry trade that defined much of the peso’s performance in 2025 is now reinforced. The significant interest rate differential between Mexico and the United States remains the dominant driver for the currency. This inflation report validates holding long peso positions and makes betting against it more difficult.
