The Bank of Mexico (Banxico) is widely expected to keep its benchmark interest rate unchanged at 6.50% for the third consecutive meeting, according to a Reuters poll of economists, as inflation risks remain tilted to the upside [1]. The central bank's monetary policy statement is anticipated to maintain a neutral stance, while acknowledging downside risks to economic growth and the influence of the US Federal Reserve's tightening cycle on the USD/MXN exchange rate [1]. Median forecasts suggest that Mexico's key rate will remain steady until at least the second half of 2028, with 8 out of 13 poll respondents expecting another rate cut and 5 predicting rates will stay unchanged [1].
In the currency markets, the Mexican Peso has extended its losses for a third straight session, falling over 0.4% as investors reduce exposure following the Federal Reserve's recent 25 basis point rate hike, which brought the US fed funds rate to a 3.75-4.00% range [2]. With Banxico's rate anchored at 6.50%, the interest rate differential between Mexico and the US has narrowed to 2.50% in favor of the Peso, marking its lowest level since 2015 [2]. This narrowing differential has contributed to the Peso's weakness, with USD/MXN trading at 17.29 and breaking above the 100-day Simple Moving Average at 17.26 [2].
Recent Mexican economic data showed August retail sales improved slightly from a -0.2% month-on-month contraction to -0.1%, but missed expectations of a 0.2% expansion. Year-over-year, retail sales growth decelerated from 2.9% to 1.8% [2]. Despite hopes for easing geopolitical tensions in the Middle East, the Peso failed to gain traction, as Banxico is expected to hold rates steady at its upcoming meeting [2]. Meanwhile, hawkish commentary from US Federal Reserve officials, including Richmond Fed President Thomas Barkin and Boston Fed President Susan Collins, has reinforced expectations for another US rate hike by December, with odds at 90% according to Prime Terminal [2].
Technical analysis indicates that USD/MXN is trading at 17.2914, above key moving averages, suggesting a bullish near-term bias, though the broader downtrend remains intact [2]. Upcoming catalysts for the USD/MXN pair include Banxico's interest rate decision and key US economic data releases [2].
CONCLUSION
Banxico is expected to maintain its policy rate at 6.50% amid persistent inflation risks, while the narrowing rate differential with the US has pressured the Mexican Peso. Market sentiment remains cautious as investors await Banxico's decision and further signals from the US Federal Reserve. The outlook for the Peso will depend on central bank actions and upcoming economic data.