Mexico's Peso Faces 2H26 Pressure, Citi Forecasts

The Mexican peso could weaken to MX$17.92 per US$1.00 in 2H26 as USMCA annual reviews, protectionist tariff risks, and a narrowing 275-basis-point interest rate differential between Banxico and the US Federal Reserve weigh on investor sentiment. Despite these headwinds, the currency’s outlook remains supported by fiscal consolidation, a modest 1.0%–1.2% GDP growth forecast, and the resilience of the US economy, which accounts for more than 80% of Mexico’s exports.

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The Mexican peso faces depreciation pressures in 2H26 following a stronger-than-expected performance in 1H26, according to Citibank’s July Citi Expectations Survey. Market participants identified USMCA negotiations, protectionist trade policies, and monetary policy decisions by Mexico’s central bank (Banxico) and the US Federal Reserve as the main factors likely to drive the exchange rate in the coming months.

Between January and June, the peso appreciated 2.86%, closing at MX$17.49 per US$1 and ranking as the sixth-best-performing currency in a broad basket of major currencies. The gains came despite heightened global market volatility following the conflict between the United States and Iran.

"The performance of the Mexican peso during the first half of the year can be described as favorable and, to some extent, better than market expectations at the beginning of the year," said Janneth Quiroz, Director of Economic, Exchange Rate, and Stock Market Analysis, Monex.

However, market forecasts point to a reversal during the second half of the year. According to the Citi survey, the consensus projects the peso to close 2026 at MX$17.92 per US$1, implying a depreciation of 2.46%, or MX$0.43, from its June closing level. Forecasts vary across financial institutions. Banco Base, for example, expects the exchange rate to end the year at MX$17.80 per US$1 under a scenario that assumes Mexico avoids a severe economic slowdown and additional aggressive US tariffs.

Interest Rate Outlook on Both Sides of the Border

Monetary policy divergence between Banxico and the Federal Reserve remains one of the principal drivers of the peso's outlook. The interest rate differential currently stands at 275 basis points, approaching the historical low of 250 basis points recorded since Banxico adopted its current monetary policy framework.

At the end of June, Banxico kept its benchmark interest rate unchanged at 6.50% in a unanimous decision, signaling an extended pause in its easing cycle to anchor inflation expectations amid persistent core inflation. The decision followed a 0.8% contraction in Mexico’s real gross domestic product (GDP) in 1Q26, prompting analysts to lower their full-year GDP growth forecasts to between 1.0% and 1.2%.

Meanwhile, the Federal Reserve maintained its federal funds target range at 3.50% to 3.75% during its June 17 policy meeting.

Analysts surveyed by Citi noted that a prolonged period of restrictive US monetary policy could strengthen the dollar and weigh on emerging-market currencies. "A more restrictive Fed for longer would strengthen the dollar globally and could trigger depreciation episodes among emerging-market currencies, including the peso," said Gerónimo Ugarte, Chief Economist, Valmex Casa de Bolsa.

USMCA and Trade Risks

Developments surrounding the United States-Mexico-Canada Agreement (USMCA) remain another major source of exchange rate uncertainty. The United States' decision not to approve the treaty's automatic extension moved the agreement into a 10-year period of annual joint reviews. During that period, the three countries may agree at any time to extend the accord for an additional 16 years. If no consensus is reached by 2036, however, the agreement will expire. "Now the big question is when that extension will be approved," said Jesús Anacarsis, Deputy Director of Analysis, Banco Base.

Trade protectionism and tariff uncertainty continue to cloud the outlook for exporters and the peso. Mexican goods paid US$22.9 billion in tariffs at US customs during the 12 months through April 2026, underscoring the financial burden facing cross-border supply chains and the importance of securing favorable outcomes during the latest USMCA review talks, which began this week in Mexico City.

Potential new US tariffs targeting strategic sectors—including automotive manufacturing, steel, and aluminum—could place additional pressure on the currency, Quiroz said.

Investors are also closely monitoring Mexico's fiscal position, public debt trajectory, and deficit reduction efforts. "Fiscal consolidation, compliance with public finance targets, and preserving Mexico's investment-grade credit rating will be key to containing the country's risk premium," Ugarte said.

External economic conditions in the United States remain equally important for the peso. The US market absorbs more than 80% of Mexican exports, meaning stronger US economic growth typically supports Mexico's economy and, in turn, the Mexican currency.