Mexican Peso weakens as looming Banxico rate cut and US Dollar rebound pressure the currency

The Mexican Peso (MXN) weakened against the US Dollar (USD) during Thursday’s US trading session as investors adjusted expectations ahead of a key interest rate decision from the Bank of Mexico (Banxico). At the time of writing, USD/MXN traded near 19.48, up 0.49% for the day, with the US Dollar gaining momentum while the Peso remained pressured ahead of Banxico’s announcement.

Banxico is widely expected to cut interest rates by 50 basis points, marking the seventh consecutive reduction, lowering the benchmark rate from 9.0% to 8.5% amid easing inflation and mounting domestic economic challenges. However, market attention centers on the tone of Banxico’s statement and any signals regarding the pace of future rate cuts.

Meanwhile, US data released on Thursday showed softer inflation and retail sales, yet failed to dent the Dollar’s recovery. Fed Chair Jerome Powell’s remarks about policy flexibility did not significantly alter the Fed’s cautious stance. The Federal Reserve continues to hold rates steady, maintaining a restrictive approach to bring inflation back to its 2% target.

The ongoing policy divergence between Banxico’s easing and the Fed’s steady tightening remains a key factor driving USD/MXN moves. While Powell acknowledged the need for a more adaptable policy amid persistent supply shocks, he emphasized the Fed’s commitment to anchoring inflation expectations. Despite initially encouraging a more dovish outlook, the US Dollar has since regained strength as investors remain cautious ahead of further Fed guidance. This dynamic, combined with expectations of continued monetary easing in Mexico, has weighed on the Mexican Peso.

Mexican Peso Daily Digest: Banxico in Focus

• Soft Inflation Data: April’s Producer Price Index (PPI) dropped 0.5% month-over-month, missing the expected 0.2% rise, while the headline PPI year-over-year eased to 2.4% from 2.7%. This decline points to reduced wholesale price pressures and reinforces the ongoing disinflation trend.
• Core Inflation Eases: Core PPI, which excludes volatile food and energy prices, declined 0.5% month-over-month and slowed to 3.1% year-over-year from 4%, indicating broad-based cooling in underlying inflation and boosting expectations of future Federal Reserve easing.
• Mixed Retail Sales: Retail sales rose slightly by 0.1% month-over-month, narrowly surpassing forecasts. However, the control group of retail sales fell 0.2% against an expected 0.5% increase, highlighting soft consumer demand and signaling downside risks to second-quarter GDP growth.
• Banxico Rate Cuts Continue: The Bank of Mexico has cut interest rates in six consecutive meetings since last August. A 50 basis-point cut expected this Thursday would bring total easing to 250 basis points (2.5%) over seven meetings.
• Fed Policy Contrast: By comparison, the Federal Reserve has cut rates three times over the same period, lowering its benchmark rate from 5.50%-5.25% to the current 4.50%-4.25% range.
• Market Sensitivity to Economic Surprises: Recent softer US inflation and retail sales data have reignited speculation about possible Fed rate cuts later this year. Continued weakening could pressure the US Dollar, while stronger data might reinforce the Fed’s higher-for-longer policy stance.
• US-Mexico Trade Tensions: Rising trade frictions threaten Mexico’s export-driven economy, with over 80% of exports destined for the US. Tariffs on goods such as steel and aluminum risk disrupting supply chains, dampening investor sentiment, and weighing on growth.
• Tariff Policy Updates: The US has imposed 25% tariffs on certain Mexican imports not covered by the USMCA, citing national security and drug enforcement concerns, increasing uncertainty in bilateral trade relations.
• USMCA Review Proposal: Mexico’s Economy Minister has proposed an early review of the US-Mexico-Canada Agreement (USMCA), according to Reuters, signaling potential renegotiation efforts.

USD/MXN Technical Outlook: Rebound from Recent Lows

USD/MXN has bounced off recent lows, climbing back above the key psychological support level at 19.40 and surpassing the April low. The pair has reversed an earlier breakdown, challenging resistance levels after a strong move from the lower boundary of the previous consolidation zone.

Immediate focus is on the 10-day Simple Moving Average (SMA) at 19.54 and the 78.6% Fibonacci retracement of the October–February rally at 19.57. A sustained break above this area would confirm a more significant bullish reversal, potentially opening the way toward the psychological 19.60 level and the 23.6% Fibonacci retracement at 19.72.

On the downside, the former resistance at 19.40 now acts as support. Failure to hold this level could see USD/MXN retesting the 19.30 area, with stronger support near the October low of 19.11, a critical medium-term level. A drop below 19.11 would confirm renewed bearish momentum, potentially pushing the pair toward the 19.00 psychological mark.

The Relative Strength Index (RSI) has strengthened to 41.38, signaling stabilizing momentum but still offering room for further gains before overbought conditions develop. Overall, this rebound may represent a key inflection point, with upcoming Banxico guidance and market reactions to Fed policy outlook likely to determine whether the recovery continues or stalls.

USD/MXN daily chart