- Mexican Peso weakens ahead of expected Banxico 50 bps interest rate cut.
- US economic data and Powell’s remarks reinforce the easing inflation narrative, but the US Dollar regains ground.
- USD/MXN rebounds after briefly breaking below a key consolidation range, with resistance levels back in focus.
Mexican Peso (MXN) is weakening against the US Dollar (USD) during the US session on Thursday, as traders recalibrate expectations around monetary policy in both countries ahead of a key rate decision from the Bank of Mexico (Banxico).
At the time of writing, USD/MXN is trading at the critical psychological level of 19.400, reversing earlier weakness and edging up from key technical support. While Banxico is widely expected to deliver a 50 basis-point cut, the market’s focus is on the tone of the statement and any signals about the future easing path. On the U.S. side, soft inflation and retail sales data released Thursday have done little to derail the Dollar’s rebound, as Fed Chair Jerome Powell’s comments on policy flexibility failed to materially shift the central bank’s cautious stance.
Mexican Peso under pressure as markets weigh Banxico easing, Fed’s steady stance
The policy divergence between Banxico and the Federal Reserve remains a key driver of USD/MXN price action. Banxico is expected to cut interest rates for the seventh consecutive meeting, lowering the benchmark rate from 9.0% to 8.5% in response to easing inflation and growing domestic economic challenges. In contrast, the Federal Reserve has kept interest rates unchanged, maintaining a restrictive stance as it seeks to bring inflation sustainably back to its 2% target.
While Fed Chair Jerome Powell acknowledged the need for a more adaptive policy framework in response to persistent supply shocks, he also reaffirmed the Fed’s firm focus on anchoring inflation expectations. His comments, paired with Thursday’s softer US inflation and retail data, initially tilted sentiment toward a more dovish Fed outlook. However, the US Dollar has regained ground as investors remain cautious ahead of further Fed communication, and as markets await Banxico’s guidance on the trajectory of future rate cuts. The Peso, meanwhile, has come under renewed pressure as traders weigh the implications of continued monetary easing in Mexico.
Mexican Peso daily digest: Banxico in focus
- Soft PPI inflation data: The Producer Price Index (PPI) fell 0.5% MoM in April (vs. +0.2% expected), while headline PPI YoY eased to 2.4% from 2.7%, pointing to reduced price pressures at the wholesale level and reinforcing the disinflation trend.
- Core inflation weakens: Core PPI, which excludes food and energy, declined 0.5% MoM and slowed to 3.1% YoY (down from 4%), indicating broad-based cooling in underlying inflation and increasing the likelihood of future Fed policy easing.
- Retail sales mixed: Retail sales rose 0.1% MoM, narrowly beating expectations, but the control group fell 0.2% vs. a 0.5% forecast—highlighting soft underlying consumption and potential downside risks to Q2 GDP.
- Banxico rate cuts: The Bank of Mexico has cut interest rates at six consecutive meetings since August. A 50 bps cut on Thursday would mark a cumulative 250 bps (2.50%) of easing over seven meetings.
- Fed stance: In contrast, the Fed has reduced rates three times in the same period, lowering its benchmark rate to the 4.50%–4.25 % range from 5.50%–5.25 %.
- Market sensitivity to surprises: Softer US data has revived market speculation about potential Fed rate cuts later this year. If future data continues to weaken, it could pressure the US Dollar, while stronger readings would likely reinforce the Fed’s higher-for-longer stance.
- Trade tensions with the US: Rising US-Mexico trade tensions threaten Mexico’s export-reliant economy, where over 80% of exports go to the US. Tariffs on goods such as steel and aluminium could disrupt supply chains, dampen investor sentiment, and weigh on growth.
- Tariff policy developments: The US has imposed 25% tariffs on certain Mexican imports not covered by the USMCA, citing national security and drug enforcement concerns, adding uncertainty to the bilateral trade environment.
- USMCA review proposal: According to Reuters, Mexico’s Economy Minister has proposed initiating an early review of the USMCA ahead of the formal 2026 timeline to provide greater clarity and confidence for investors amid rising trade friction.
USD/MXN rebounds off support, tests key resistance as bearish momentum pauses
USD/MXN has rebounded off recent lows, recovering above the key 19.40 level after briefly extending its decline below the 78.6% Fibonacci retracement of the October–February rally at 19.57. The pair is currently trading around 19.42, staging a technical bounce after decisively breaking below the prior consolidation range.
The move back above 19.40 suggests a pause in the prevailing bearish trend, though momentum remains fragile. The purple-box consolidation range previously broken to the downside now serves as a reference for potential resistance retests, with the 10-day Simple Moving Average (SMA) at 19.53 acting as a dynamic ceiling. A clear break above this zone would open the door toward the 78.6% Fib at 19.57 and possibly the psychological 19.60 level.
USD/MXN daily chart
On the downside, the October low at 19.11 remains a critical medium-term support. While the Relative Strength Index (RSI) has edged up to 41.2, it continues to hover near oversold territory, suggesting limited bullish conviction at this stage. A failure to hold above 19.40 could renew bearish pressure and refocus attention on the 19.20–19.11 zone as the next downside targets.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
