Mexican Peso weakens due to profit-taking and market caution
On Tuesday, the Mexican Peso (MXN) weakened, potentially due to profit-taking after last week’s 3.9% rally against major currencies like the US Dollar (USD), Euro (EUR), and Pound Sterling (GBP). Another factor could be trader caution ahead of the Federal Reserve’s (Fed) upcoming policy announcement on Wednesday.

Fed rate cut speculation impacts Peso
Traders are speculating that the Fed may cut interest rates by 0.50%, which could further weaken the USD/MXN pair. A cut in US rates would widen the interest rate gap between the US and Mexico, attracting capital to Mexico, where interest rates are higher at 10.75%, favoring Peso appreciation.

US Retail Sales data tempers expectations of a large Fed cut
Retail Sales data released on Tuesday showed a 0.1% rise in August, compared to 1.1% in July. This slightly reduced the market’s expectations of a 0.50% rate cut by the Fed, with the probability dropping from 67% to 65%.

Peso weakens against GBP and EUR
The Mexican Peso also depreciated against the Pound and Euro as the Bank of England (BoE) and European Central Bank (ECB) are less likely to cut rates aggressively. Both the UK and Eurozone face slower growth, but inflation remains high, leading to delayed interest rate cuts.

Political reforms and their influence on the Peso
Domestically, the Peso has been influenced by political developments, including President AMLO’s signing of a controversial judicial reform. Concerns over foreign investment declines due to proposed constitutional changes have recently eased.