• The Mexican Peso tardes slightly lower, extending the mild weakening from Monday.
• US Retail Sales data, the Fed policy meeting and BoE meeting are key events this week. 
• USD/MXN forms a bearish “Three Black Crows” Japanese candlestick pattern. 

The Mexican Peso (MXN) edges lower on Tuesday morning after mildly retreating the prior day. This may be as a result of profit-taking after MXN’s average 3.9% rally last week against its most heavily-traded counterparts (the US Dollar (USD), the Euro (EUR), and the Pound Sterling (GBP)), or possibly trader caution ahead of the much-anticipated Federal Reserve (Fed) policy meeting announcement on Wednesday. 

Mexican Peso trades tight ahead of Fed meeting

The Mexican Peso trades flat as the market debates the possibility that the Fed will cut interest rates by a double-dose 0.50% at their meeting on Wednesday, with the CME FedWatch tool now referencing a 67% probability of such a “jumbo” cut. This is more than double the probability of a 0.25% cut alone (33%). The chances of 0.50% have risen eight percentage points higher than yesterday’s 59%.  

A cut to base interest rates in the US would widen the already substantial gap between the two countries and weaken the USD/MXN. In Mexico, the Bank of Mexico (Banxico) has set a base rate of 10.75% versus the Fed’s 5.25%-5.50% band. If the Fed cuts by 0.50%, as now seems likely, the Fed’s rate will fall to 4.75%-5.25%. This, in turn, will favor capital flowing to Mexico, where it can earn substantially more interest, resulting in increased demand for the Mexican Peso and its appreciation. 

US Retail Sales data for August out at 12:30 GMT on Tuesday is the last major economic data release for the US prior to the conclusion of the Fed meeting on Wednesday. Economists expect a 0.2% rise month-over-month after a 1.0% rise in July. If the data undershoots, it will ratchet up the chances of a 0.50% cut even higher, and the opposite if it beats them.