Mexican Peso softens ahead of Banxico decision as economic outlook weighs

• The Mexican Peso falls as traders brace for a 50-basis-point rate cut amid signs of cooling inflation and weak economic activity.
• Banxico expected to slash rates by 50 bps as economy shows signs of fatigue.
• Economic activity remains in contraction despite solid retail sales and marginal January improvement.

The Mexican Peso (MXN) depreciates against the US Dollar (USD) during the North American session on Wednesday following the release of economic data during the week, which highlighted the evolution of the disinflation process as well as an economy that is weakening. The USD/MXN trades at 20.08, up 0.20%.

Traders are bracing for Banco de Mexico's (Banxico) monetary policy decision on Thursday. The central bank is expected to reduce rates by 50 basis points (bps) from 9.50% to 9% due to the evolution of the disinflation process and signs that the economy is slowing down.

This week, Mexico's economic schedule revealed that Economic Activity in January improved compared to December but remained in contractionary territory for the second consecutive month. Meanwhile, inflation data was positive as the first-half inflation in March dropped in both headline and core readings, an indication of the evolution of the disinflation process.

Other data showed that Retail Sales in January were solid, exceeding the previous month's reading and forecasts, but it is the first solid reading since April 2024, as sales shrank during the last eight straight months.

Given the backdrop, further upside is seen in USD/MXN. However, if US President Donald Trump makes tariff exemptions to Mexico, the outlook for the economy could improve. Hence, the Peso could strengthen and exert downward pressure on the exotic pair.

Ahead this week, Mexico's docket will feature the Balance of Trade and Banxico's interest rate decision. Across the border, the US schedule will feature the release of the Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Price Index.

Daily digest market movers: Mexican Peso drops ahead of Banxico's meeting

• The Citi Expectations Survey revealed that most private economists expect Banxico to reduce rates by 50 basis points. According to the survey, Mexico's primary reference rate is expected to end 2025 at 8%, down from 8.25%.
• The same survey projects the USD/MXN to end at 20.98, down from 21.00 in the last poll.
• Inflation expectations remained anchored in the high 3% range, while GDP is foreseen expanding by 0.6%, down from 0.8% in the last survey.
• Traders had priced the Fed to ease policy by 64 basis points (bps) throughout the year, according to data from the Chicago Board of Trade.

USD/MXN technical outlook: Mexican Peso loses traction as USD/MXN rises past 20.10

USD/MXN remains upwardly biased. Although it has refreshed a two-day high at 20.16, it fell below 20.10, paving the way for further downside. The Relative Strength Index (RSI) shows that momentum does not support either buyers or sellers, hinting at choppy trading conditions.

That said, the first key support would be the 20.00 figure. If hurdled, the next support would be the 200-day Simple Moving Average (SMA) at 19.71, followed by the September 18 swing low of 19.06. On the other hand, if USD/MXN bulls clear the 20.20 mark, the exotic pair would be poised to test the confluence of the 100-day and 50-day SMAs at 20.22 and 20.38 each, ahead of the 20.50 area.