The Mexican Peso falls before the publication of Banxico Minutes

• The Mexican Peso is trading lower against its key peers ahead of the release of the minutes of Banxico’s June meeting.
• Uncertainty over the future path of monetary policy in Mexico is making traders hesitant to place bets.
• Peso weakens further against Pound after better-than-expected UK GDP data.

The Mexican Peso (MXN) is trading mixed against its key peers on Thursday, rising against the US Dollar (USD) but falling against the British Pound (GBP) and the Euro (EUR). The MXN’s weakness against the Pound can be attributed to the release of UK Gross Domestic Product (GDP) data for May, which came in at 0.4% on a monthly basis, far exceeding economists’ estimates of 0.2%.

Traders are also on tenterhooks ahead of the release of the minutes of the Bank of Mexico’s (Banxico) latest monetary policy meeting. Uncertainty over the path of interest rates has increased following the release of higher-than-expected headline inflation data in Mexico for June. The impact of the devaluation of the Peso following the June elections and anticipated imported disinflation are other factors complicating the outlook.

At the time of writing, one US Dollar (USD) buys 17.86 Mexican Pesos, EUR/MXN is trading at 19.37 and GBP/MXN at 23.00.

Mexican peso down ahead of Banxico minutes

The Mexican Peso is edging lower on Thursday after rallying for roughly the past nine days, especially against the US Dollar. Traders are cautious about placing bullish bets ahead of the release of the minutes of Banxico’s June meeting, scheduled for 15:00 GMT.

The minutes should provide more information on Banxico’s stance on the economy and the direction of future policy. This, in turn, could influence the peso.

“We expect the minutes to elaborate on both the forces of disinflation and some of the upside risks embedded in the ongoing rebalancing of the MXN, and the forces behind the growth disappointments,” JP Morgan analysts say.

Banxico’s board is expected to acknowledge “disappointing growth dynamics and downgrade its growth outlook, now openly underlining downside risks to economic activity,” they added.

If anything, JP Morgan’s preview suggests the peso is at risk of weakening following the release, as a downgrade in growth outlook will put more pressure on Banxico to cut interest rates despite the above-consensus rise in June headline inflation data. Lower interest rates are negative for a currency as they reduce foreign capital flows.

Mixed reaction to inflation data causes uncertainty

The 12-month inflation rate in June came in at 4.98%, which was higher than the 4.84% expected by economists and the previous 4.69%, according to INEGI data.

Banxico Deputy Governor Jonathan Heath wrote in X that June’s inflation data was “very worrying.” Heath is seen as a monetary “hawk” on Banxico’s board, in favor of higher interest rates, similar to Deputy Governor Irene Espinosa.

“Headline inflation hit 4.98% in June, the highest inflation rate in the past 12 months. At the margin, the annual rate for the second half of June clocked in at 5.17%. Very worrying,” Heath wrote.

This comes after Heath’s comments comparing his stance to that of Federal Reserve Chairman Jerome Powell in terms of data dependence. The effect of his words was to reduce rate cut bets and further fuel the Peso’s rally.

The deputy governor of the Bank of Mexico, Galia Borja, urged caution in recent statements.

“It is prudent not to make hasty decisions” regarding monetary policy, Borja said, adding that officials should be patient and that current policy was “certainly restrictive.”

Slowing core inflation could be key – Capital Economics

Although headline inflation in Mexico rose in June, core inflation, which excludes volatile food and energy components, came in below expectations at 0.22%, when economists had estimated 0.24%. However, the June reading was higher than the 0.17% in May.

The slower rise in core inflation, however, makes Capital Economics economists less concerned about rising headline inflation.

“Core inflation eased last month. While there is still a lot of uncertainty surrounding the upcoming rate decision in August, we believe that easing underlying price pressures, coupled with the weak activity data series and the rebound in the Peso, leave open the possibility of a rate cut in August,” says Kimberley Sperrfechter, Emerging Markets Economist at Capital Economics.

Assuming Banxico goes ahead and cuts interest rates in August, this could have a negative impact on the Peso.

Technical Analysis: USD/MXN possible in ABC correction

USD/MXN is likely falling in wave C of an ABC correction that started after the June 12 high. The short-term trend is bearish, and since “the trend is your friend,” the odds favor further declines.

USD/MXN Daily Chart

USD/MXN has broken the support at 17.87 (June 24 low), however, the breakout was not decisive, indicating the possibility of a false break and the pair could recover.

The USD/MXN has also fallen to the conservative target for wave C, which is measured by taking the 0.618 Fibonacci ratio of wave A as a guide, as C is often equal to A or a Fibonacci ratio of it. Since the pair has reached this minor target, there is a higher risk of a recovery developing.

If USD/MXN breaks below Wednesday’s low at 17.76, however, this would reinvigorate the bears and likely lead to a move towards the target at the end of wave C, at approximately the level of the 50-day simple moving average (SMA) located at 17.60.

Meanwhile, the direction of medium- and long-term trends remains uncertain.