Peso Stalls Ahead of Banxico Decision as Divergence with Fed Widens

The Mexican peso has been losing momentum against the US dollar in recent trading sessions, with USD/MXN gaining over 1.7% in the last three sessions.

This renewed strength of the dollar is despite markets preparing for tomorrow's Banco de México policy decision, suggesting that expectations surrounding the event have not been sufficient to support a consistent recovery in the Mexican currency.

Markets are widely expecting Banxico to leave interest rates unchanged at 6.5% for the third consecutive meeting, driven by the recent slowdown of inflation from its peak of 4.59% in March to 3.26% in August, close to Banxico's 3.00% target.

The divergence between Banxico and the Federal Reserve is becoming increasingly important, with over a 70% probability assigned to another Federal Reserve rate hike at the October meeting, potentially taking rates to the 4.25% area.