Mexico has secured another 90-day extension on tariff increases, thanks to the strong relationship between its president and the U.S. president. While some issues remain unresolved, this connection offers hope for future improvements. The Mexican Peso’s current focus is on domestic matters, especially July’s inflation figures. Year-on-year inflation is expected to dip, approaching the 3% target due to the effects of last July’s price surge.

Inflation And Interest Rates

Though inflation is set to improve, price increases in the core rate have continued. July’s figures are forecasted to drop only slightly. As a result, Banxico is expected to reduce interest rates by 25 basis points, less than earlier cuts, influenced by the postponed tariffs. This change in interest rates is unlikely to significantly impact the Peso, as it aligns with analyst expectations. Many analysts anticipate this decision, which reduces its effect on the currency’s value. With the 90-day suspension of U.S. tariffs, we see a chance for reduced external risks for the Peso. This is evident in the derivatives market; one-month implied volatility on the USD/MXN pair has decreased from over 14% in July 2025 to about 11% this week. This trend suggests a more stable, range-bound environment for the currency in the coming weeks. Given this lower volatility, we find strategies that benefit from stability, like selling strangles, appealing. With the Mexican Peso trading around 17.15 against the dollar, we expect a trading range of 16.90 to 17.40 through early September. Traders might opt to collect premium rather than invest in significant directional bets.

Banxico’s Interest Rate Decision

The upcoming decision from Banxico about interest rates is not expected to disrupt this calm. A 25 basis point cut is widely expected and likely already factored into current prices, marking a slowdown from the 50 basis points cuts we had earlier in 2025. Unless the central bank surprises the market with a hold or a more substantial cut, reactions should be minimal. Our attention now shifts from the rate decision to Banxico’s future guidance and upcoming inflation reports. We are particularly watching the core inflation rate, which has stubbornly stayed above 4.3% recently. If core prices don’t cool as anticipated, the central bank may adopt a more hawkish stance later this year. This period of stability contrasts sharply with the high-alert atmosphere during trade talks in 2019, when peso volatility often spiked in response to political news. The current environment supports Peso strength, but the narrowing interest rate gap with the United States calls for caution. We will keep an eye on this differential as a crucial indicator for the sustainability of any carry trade. Create your live VT Markets account and start trading now.

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