Mexico FX Today: Peso steady as Banxico prepares new rate cut

The Mexican Peso (MXN) edges slightly lower against the US Dollar (USD) on Wednesday, with the USD/MXN pair trading at 18.41 at the time of writing, up 0.3% on the day. However, the pair stabilizes near recent lows as the Mexican currency remains supported by the appeal of the interest rate differential, despite markets now preparing for further monetary easing by the Bank of Mexico (Banxico).

At 19:00 GMT on Thursday, the Banxico is widely expected to cut its key interest rate by 25 basis points to 7.50%.

For Forex investors, the meeting represents a key moment. The balance between sluggish growth, still-sticky inflation and monetary support will determine the short-term trajectory of the Mexican currency.

Easing cycle already underway

Banxico has already cut its key interest rate 10 times since the central bank started easing monetary policy in March 2024, against a backdrop of slowing domestic activity.

According to BBVA, "the Mexican economy continues to be held back by sluggish domestic demand and investment, which justifies the continuation of monetary easing".

With the US Federal Reserve (Fed) having resumed a rate-cutting cycle in September, Banxico's room for maneuver is widening, as the central bank no longer has to fear a too-narrow yield differential with the United States.

The economists' consensus is in line with this. A Reuters survey of 24 analysts reveals unanimous agreement on the prospect of a 25-basis-point cut this week, with a year-end rate of close to 7.00% as a target. The question, then, is not so much Thursday's move as the pace of the cycle ahead.

Inflation still under scrutiny

Inflation remains a key concern. According to data from Mexico's National Institute of Statistics and Geography (INEGI) reported by Reuters, consumer prices accelerated to 3.74% year-on-year in mid-September, from 3.49% previously, approaching the upper limit of Banxico's target of 3% ±1 point.

This explains the persistent dissension within the Banxico Board. Jonathan Heath, one of the central bank’s Vice-Governors, opposed the latest rate cuts, judging that the rise in core inflation did not allow for further easing.

As MNI Markets points out, "the vote could once again be split 4-1, with Heath favoring the status quo".

Growth still fragile

The momentum of the Mexican economy remains fragile. Industrial production fell by 1.2% month-over-month in July, dragged down by construction and manufacturing, according to BBVA. Leading indicators point to a further contraction in activity in August. 

For Scotiabank's Juan Manuel Herrera, "economic data continue to point to sluggish growth and should reinforce the Council's accommodative wing".

At the same time, foreign demand is showing signs of resistance. Growth in overall exports has not been materially impacted by US tariffs, averaging a 7% year-over-year pace in the year-to-July, notes Scotiabank.

Imports, however, fell back sharply, reflecting the climate of uncertainty linked to trade tensions and the renegotiation of the United States-Mexico-Canada Agreement (USMCA).

Technical analysis of USD/MXN: The rebound remains fragile

USD/MXN 4-hour chart. Source: FXStreet

After a long period of horizontal consolidation lasting since July, USD/MXN broke its support at 18.51 on September 11, triggering a bearish acceleration towards the lowest level in over a year, marked at 18.20 on September 17.

Since this low, USD/MXN has entered a rebound phase, following a bullish support line. However, the trend is beginning to show signs of running out of steam below 18.45.

A break above 18.45 and especially the former support at 18.51, which could offer solid resistance reinforced by the 100-period Simple Moving Average (SMA) on the 4-hour chart, could revive bullish pressure, with potential targets at 18.85 and 18.95.

Conversely, a break below the bullish support line, currently at 18.34, could relaunch downward pressure, with a potential return to the September low at 18.20.