The Mexican peso rises after Banxico decides to maintain interest rates

• The Mexican Peso obtains moderate gains after the meeting of the Bank of Mexico (Banxico).
• The bank decided to cut interest rates by 25 basis points and revised its inflation forecasts downward.
• USD/MXN rises steadily within its ascending channel.

The Mexican Peso (MXN) rises slightly in its main pairs on Friday, a day after the monetary policy meeting of the Bank of Mexico (Banxico) in which the bank decided to cut interest rates by 25 basis points (0.25 %), bringing the official interest rate to 10.50% from the previous 10.75%.

Changes in interest rates can have a high impact on exchange rates. However, the cut was in line with consensus expectations, so the Peso remained relatively stable following the announcement.

Revisions to Banxico’s forecasts for the economy, however, suggest that there will likely be more interest rate cuts in the future, with potentially negative implications for the MXN.

Mexican peso weighed down by downwardly revised inflation forecasts

The Mexican peso ended the day unchanged following Banxico’s rate decision, closing Thursday close to where it started in its major peers.

The bank decided to cut interest rates by 25bps to 10.50% as expected, with four of the board members voting in favor of the decision and one dissenter – Jonathan Heath – voting to keep rates unchanged.

Banxico, however, revised its inflation forecasts downward in light of recent data that showed a slowdown in price pressures. Forecast headline inflation (INPC) of 5.1% in the third quarter of 2024, up from 5.2% in the August policy statement, and 4.3% instead of 4.4% in the fourth quarter . As for core inflation, the bank expects it to fall to 3.8% in the fourth quarter of 2024, down from 3.9% in the previous forecast, and to 3.5% in the first quarter of 2025, down from to the previous 3.6%.

Banxico’s statement noted that “Mexico’s economy is going through a period of weakness” and that the balance of risks to growth remains on the downside.

With lower inflation expected and doubts over economic growth, forecast revisions suggest a higher likelihood of further interest rate cuts from Banxico in the future.

“We are forecasting two more 25 bp cuts this year at the November 14 and December 19 meetings, respectively, bringing the year-end rate to 10.00%. This is on top of a total of 200 bp of cuts throughout over the next year,” Rabobank said in a note.

Advisory service Capital Economics had a similar view, stating: “Overall, we expect two more 25bp interest rate cuts over the rest of the year, to 10.00%. The easing cycle is likely to be a little more stop-and-go next year as it will take time for inflation to fall to the central bank’s 2-4% target Our end-2025 forecast of 8.50% is above consensus expectations,” Liam said. Peach, Senior Emerging Markets Economist.

Technical Analysis: USD/MXN continues its steady rise within the channel

The USD/MXN continues to trade within its ascending channel while extending the bullish bias of recent months. In general, it is in an uptrend in the short, medium and long term. Given the theory that “the trend is your friend”, it is more likely to continue rising.

USD/MXN Daily Chart

Thursday’s close above 19.63 (September 25 high) provided further bullish certainty of the pair’s near-term bullish bias after it recently bottomed at the base of the ascending channel, towards a target at 20.15, the year’s high .

A further break above 19.75 (the September 26 high) would create a higher high and provide even more evidence of an extension of the uptrend.