• Mexican Peso weakens as investors eye Banxico policy decision on Thursday.
• Mexico’s retail sales data indicate cautious consumer spending, setting stage for Banxico's potential 25 bps rate cut.
• Banxico rate cut may shrink US-Mexico rate gap, possibly nudging USD/MXN near 17.00.
• Decision might not be unanimous as Deputy Governors Espinosa and Heath expressed concerns over persistent inflation.

The Mexican Peso begins the session on the defensive against the US Dollar as investors prepare for the Bank of Mexico (Banxico) monetary policy decision. Most analysts expect a 25-basis-point rate cut, which would lower reference rates to 11.00%. The USD/MXN pair exchanges hands at a 16.74 for a gain of 0.4%.

Mexico’s economic docket featured retail sales for February, which improved on a monthly basis, yet suggests consumers are spending less. In the 12 months to January, sales missed estimates and plunged sharply. Later at 19:00 GMT, the Banxico Governing Council led by Governor Victoria Rodriguez Ceja will likely cut rates for the first time since mid-2021.

The decision is expected to be split, as two Deputy Governors, Irene Espinosa and Jonathan Heath, expressed their disagreement with easing policy, adding that inflation remains high and stubbornly stickier than expected. Although February’s inflation cooled from 4.88% to 4.40% and core figures decreased from 4.76% to 4.64%, external factors could trigger a second wave of inflation.

In the meantime, traders continued to digest the latest monetary policy decision by the Federal Reserve, which held rates unchanged and kept their projections for three 25 bps rate cuts toward year end. Although revising the federal funds rate (FFR) level upward to 3.9%, the Fed’s decision was perceived as dovish.

Given the backdrop, if Banxico lowers rates, that would decrease the interest rate spread between the US and Mexico, bolstering the USD/MXN, which could hit 17.00 following the decision.