In January, Mexico’s core inflation was slightly higher than expected. It was forecasted at 0.59%, but the actual rate came in at 0.6%.
This small rise shows that there are ongoing pressures in the economy. Core inflation, which excludes unstable items like food and energy, is an important indicator of long-term price trends.
Monetary Policy Influence
These numbers could affect monetary policy decisions. Analysts pay close attention to this data to understand the economy’s health and future directions.
Mexico’s central bank sets interest rates based on inflation trends. If inflation remains consistently higher than expected, the bank may adjust its policies to manage inflation.
This unexpected rise in core inflation signals to the Bank of Mexico that price pressures may be more persistent than we thought. As a result, the chances of an interest rate cut soon have significantly decreased.
We can expect the Mexican peso to gain strength in the upcoming weeks. A good strategy would be to prepare for a lower USD/MXN exchange rate. You might consider selling near-term futures contracts or buying put options on USD/MXN to benefit from this outlook.
Interest Rate Swap Curve Impact
This data is particularly relevant because Banxico recently kept its overnight rate at 10.50% during its late January meeting. The market had anticipated a possible rate cut in the second quarter, but this new report pushes that timing further back. A similar delay occurred in the third quarter of 2025 due to comparable data. Currently, fed funds futures show only a 15% chance of a Banxico rate cut before June, down from 40% last week.
We should also consider the TIIE interest rate swap curve. The expectation that rates will stay elevated for longer should raise prices at the front end of the curve. You can express this view by entering trades that receive the fixed rate on 3-month and 6-month TIIE swaps.
Following this surprise, we should expect increased implied volatility in the peso. One-month implied volatility on USD/MXN has already risen from 11.5% to 12.8% shortly after the data release. This makes buying options, like straddles, a smart strategy to trade on the possibility of bigger price fluctuations.
The successful carry trade that boosted the peso’s performance in 2025 is now even stronger. The large interest rate gap between Mexico and the United States continues to drive the currency. This inflation report confirms that holding long peso positions is a wise choice and makes betting against it harder.
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