The Mexican peso gains ground on Thursday

• The Mexican peso claimed higher ground against the US dollar on Thursday.
• The greenback sold off after retail sales rose in the US.
• Markets are still pricing in a September Fed rate cut, but strong retail sales have allayed fears of a slowdown.

The Mexican peso (MXN) rose three-quarters of a percent against the US dollar (USD) on Thursday as the greenback softened broadly. US retail sales strongly eclipsed forecasts, prompting investors to shrug off recent concerns about an economic slowdown. Rate markets pulled back their bets on a double rate cut by the Federal Reserve (Fed) in September.

Mexico’s central bank (Banxico) is standing firm on its recent decision to cut interest rates from 11% to 10.75%, even as headline inflation rose to 5.57% in July. Citing a long-term decline in core inflation and a broader slowdown looming over Mexico’s domestic economy, Banxico Deputy Governor Omar Mejia noted during an interview Thursday that:

… a cut with a degree of restriction was not only appropriate, but also timely and effective; to consider only one data point in the margin would be to forego a sufficient amount of information that we… need to incorporate into our decisions.

Banxico’s measure of core inflation slowed to 4.05 percent in July, down from 4.13 percent the previous month. Mexico’s central bank expects core inflation to reach its 3% target sometime in Q4 2025.

Daily market reasons: Peso supported by risk-on sentiment crowding the group

• US retail sales rose 1.0% in July, the gauge’s biggest print since February 2023.
• Rising US retail sales, a strong sign of good economic health, led to a broad recovery in risk appetite, sending the greenback lower.
• All is not rosy: Markets shrug off a -0.6% contraction in US industrial production in July, the gauge’s worst print since November 2023.
• Rate markets have trimmed bets on a double 50bps Fed cut in September to less than 25%, but still see a 76% chance of at least a quarter-point rate cut.
• Friday’s University of Michigan consumer sentiment index will provide one final data point for investors trying to reduce rate cut bets. The survey response index is expected to rise to 66.9 from 66.4.

Mexican peso price forecast: Weak greenback gives peso room to move

The Mexican peso posted a third consecutive gain on Thursday as the US dollar pulled away to allow a peso recovery. USD/MXN has broken below 18.80 for the first time since early August and is heading towards the 50-day EMA near 18.33 as long as current trends hold.

MXN is on track to gain ground against the greenback for all but one of the past seven consecutive trading days. However, USD/MXN is coming off a very high level after the pair rallied more than 23% from 2024 lows to hit a 22-month high above 20.00 in early August.

USD/MXN Daily Chart