The Mexican peso weakens further after Banxico’s decision to cut interest rates

• The Mexican peso is between warm gains and losses following the Bank of Mexico (Banxico) meeting.
• The bank decided to cut interest rates by 25 bps and revised down its inflation forecasts.
• USD/MXN is steadily climbing in its rising channel.

The Mexican peso (MXN) fluctuated between warm gains and losses across its major pairs on Friday, a day after the Bank of Mexico’s (Banxico) policy meeting at which the bank decided to cut interest rates by 25 basis points (0.25 %), bringing the official cash rate down to 10.50% from 10.75% previously.

Changes in interest rates can have a big impact on exchange rates. However, the reduction was in line with consensus expectations, so the Peso remained relatively stable following the announcement.

However, revisions to Banxico’s forecasts for the economy suggest that more interest rate cuts are likely on the way, with potentially negative implications for the MXN.

The Mexican peso was weighed down by downwardly revised inflation forecasts

The Mexican peso ended the day little changed following Banxico’s interest rate decision, ending Thursday close to where it opened across its major pairs.

The bank decided to cut interest rates by 25bps to 10.50% as expected, with four of its board members voting to support the decision and one dissenter – Jonathan Heath – voting to keep rates unchanged.

Banxico, however, revised its inflation forecasts in light of recent data that showed a easing of price pressures. It forecast headline inflation (CPI) at 5.1% in Q3 2024, down from 5.2% in the August policy statement and at 4.3% instead of 4.4% in Q4. In terms of core inflation, the bank saw it fall to 3.8% in Q4 2024, below the 3.9% previously forecast, and to 3.5% in Q1 2025, down from 3.6% previously .

Banxico’s statement noted that “Mexico’s economy is going through a period of weakness” and that the balance of risks to growth remains on the downside.

With lower inflation expected and doubts about economic growth, the forecast revisions suggest a greater likelihood that Banxico will make more interest rate cuts in the future.

“We anticipate two more 25bp cuts this year at the November 14 and December 19 meetings, respectively, taking the year-end rate to 10.00%. This is in addition to a total of 200 bps cuts over the next year,” Rabobank said in a note.

Consultancy Capital Economics took a similar view, saying: “Overall, we expect two more 25 basis point interest rate cuts over the rest of the year, to 10.00%. The easing cycle is likely to be a bit more stop-start next year as it takes time for inflation to fall to the central bank’s 2-4% target. Our end-2025 forecast of 8.50% is above consensus expectations,” said Liam Peach, Senior Economist for Emerging Markets.

Technical Analysis: USD/MXN continues to rise steadily within the channel

USD/MXN continues to trade in its ascending channel as it extends the uptrend of recent months. It is generally in an uptrend in the short, medium and long term. Given the theory that “the trend is your friend”, it is more likely to continue higher.

USD/MXN Daily Chart

Thursday’s close above 19.63 (September 25 high) provided more bullish certainty about the pair’s short-term uptrend after recently bottoming out at the base of the rising channel towards a target of 20.15, the maximum of the year.

A further break above 19.75 (September 26 high) would create a higher high and provide further evidence of the extension of the uptrend.