USD/MXN forecast ahead of Banxico decision, Mexico inflation data

The USD/MXN exchange rate continued its strong downward trend this month as investors waited for the coming Banxico interest rate decision. It was trading at 18.60 on Thursday, down by over 12% from its highest point this year.

Banxico interest rate decision

The USD/MXN pair will be in the spotlight on Thursday as Mexico publishes the latest consumer price index (CPI) data.

Economists polled by Reuters expect the upcoming data to show that the headline consumer inflation remained at 0.28% on a month-on-month basis in July. 

The figure is seen as dropping from 4.32% to 3.53% on an annualized basis. While this drop will be encouraging, it is worth noting that Mexico’s inflation has been in an upward trajectory since it started the year at 3.59%.

Core inflation, which excludes the highly volatile food and energ prices, is expected to come in a 4.23%, down slightly from the previous year’s 4.24%. 

These numbers will come a few hours before the Mexican Central Bank delivers its interest rate decision. Economists believe that the bank will decide to cut interest rates from the current 8% to 7.75%.

Banxico, as the central bank is commonly known, has been cutting interest rates since May last year. It has moved them from a peak of 11% in 2024 to the current 8%.

The bank’s decision comes as investors remain concerned about the Mexican economy amid a trade conflict with its top trading partner.

On the positive side, the US and Mexico are continuing their talks, which could lead to a deal. However, as with other countries, it is likely that Mexican goods entering the US will be subject to 10% to 15% tariff.

Fed interest rate cuts hope

The USD/MXN exchange rate has pulled back as investors remain optimistic about the upcoming interest rate cuts by the Federal Reserve. 

Economists expect the bank to start cutting rates in September as the labor market deteriorates. 

A report released on Friday showed that the US created just 73k jobs, and if the trend continues, the final figure will be lower than expected once the adjustments are made.

With inflation rising and the economic growth slowing, it is now highly likely that the Fed will opt to cut rates. Interest rate cuts lead to higher inflation as they encourage spending.

Banxico and Federal Reserve interest rate cuts will invalidate the carry trade opportunity that has existed recently. This is a situation where people borrow a lower-rate currency to invest in a higher-rate one.

USD/MXN technical analysis

The daily chart shows that the USD to MXN exchange rate has been in a strong downtrend in the past few months. It dropped from a high of 21.3 to the current 18.60.

The pair has formed an inverse cup-and-handle pattern, which often leads to more downside. It has also plunged below the 50% Fibonacci Retracement level. 

Therefore, the pair wil likely continue falling as sellers target the 61.8% retracement level at 18.20.