Mexican Peso hits 7-month high amid weak US Dollar, eyes on Banxico

• The Mexican Peso strengthens as US-China tariff pause boosts risk appetite; USD retreats after a rally on policy shift rumors.
• Banxico set to cut rates for seventh straight time, narrowing rate gap with US and tempering further MXN gains.
• Goldman Sachs revises Mexico's 2025 GDP forecast to 0%, improving from prior -0.5% outlook.

The Mexican Peso (MXN) extended its gains on Wednesday, hitting a seven-month high against the US Dollar (USD) as the latter retreated somewhat amid an improvement in market sentiment fueled by the US-China trade truce. At the time of writing, USD/MXN trades at 19.39, down 0.98%.

The US equity markets are trading mixed, as the three major US indices have turned positive in the year following their slide, which began on April 2, the so-called US Liberation Day. Rumors that the White House favors a weakened US Dollar dissipated, as an article in Bloomberg stated that US officials "are not working to include currency policy pledges in the agreements, according to a person familiar with the matter."

In Mexico, the economic schedule remained absent on Tuesday and Wednesday. Nevertheless, Banco de Mexico (Banxico) will reveal its monetary policy on Thursday. Economists expect a 50-basis-point (bps) rate cut, the seventh straight reduction to Mexico's main reference rate.

Banxico's decision will reduce the interest rate differential between Mexico and the US. This favors further USD/MXN upside, but a sudden change in Mexico's economic outlook would cap the exotic pair gains.

Goldman Sachs has upwardly revised Mexico's economic growth for 2025 to 0% from the previously projected 0.5% contraction.

In the US, the economic docket will feature inflation figures on the producer side, Retail Sales data, and Fed Chair Jerome Powell's speech.

Daily digest market movers: Mexican Peso rallies sharply ahead of Banxico's decision

• If Banxico reduces rates by 50 bps, it would mark a cumulative 250 bps of easing after the central bank embarked on its easing cycle.
• Recently, Mexico's Economy Minister, Marcelo Ebrard, announced that the USMCA revision will commence in the second half of 2025.
• On Monday, Mexico's Industrial Production slowed in March, as revealed by the Instituto Nacional de Estadística, Geografía e Informática (INEGI). This, combined with GDP figures that narrowly avoided A technical recession, is likely to undermine the Mexican currency.
• Notably, investors reduced their bets that the Federal Reserve (Fed) will only cut rates twice rather than thrice this year, as indicated by data from the Chicago Board of Trade (CBOT). The December 2025 fed funds rates futures contract shows that market players expect 57 basis points of easing.
• Therefore, monetary policy divergence between the Fed and Banxico might add pressure on the Peso and push the USD/MXN exchange rate higher.

USD/MXN technical outlook: Mexican Peso skyrockets, with USD/MXN poised to test 19.00

USD/MXN downtrend resumed on Wednesday as the pair hit a multi-month low of 19.29, with traders eyeing the 19.00 figure. A breach of these two levels could pave the way for a challenge to the August 19, 2024, swing low of 18.59. From a momentum standpoint, the Relative Strength Index (RSI) remains bearish. Therefore, further downside lies ahead.

Conversely, if USD/MXN climbs past the 19.50 area and reaches a three-day high of 19.66, surpassing the 20-day Simple Moving Average (SMA), it may retreat somewhat.