By Felipe Barragán, Expert Research Strategist at Pepperstone

September 10, 2025 – “The peso traded with a firmer tone as the CPI release largely validated the view that Mexico’s disinflation is advancing, but unevenly. Headline inflation for August rose just 0.06% m/m and held at 3.57% y/y, while core inflation increased 0.22% m/m and 4.23% y/y. The mix matters: the non-core basket fell on cheaper agricultural items, but services within core remained comparatively sticky; merchandise prices cooled modestly. That composition supports the narrative of “grinding disinflation with services inertia,” rather than a clean, broad-based slide.

For FX, that nuance points to continuity rather than a regime change in policy expectations. Banxico has already slowed the easing pace, trimming the policy rate to 7.75% in August in a split vote, and its latest quarterly report still projects headline and core near 3.7% by 4Q25—i.e., progress toward target, but not so fast as to warrant aggressive cuts. Today’s CPI—soft headline helped by volatile items, firmer services—reinforces a gradualist path that preserves much of the peso’s real-rate cushion for now. Carry remains a key pillar of MXN support, especially with global volatility subdued and U.S. yields easing into the Fed’s own cutting cycle.

Two additional currents help explain why downside in MXN has been limited despite ongoing domestic growth questions. First, international demand for high-carry EM FX has re-emerged as the “dollar exceptionalism” impulse fades; Mexico, with still-elevated real rates and deep local markets, screens well in that context. Second, sovereign risk optics have steadied at the margin—S&P reaffirmed Mexico at ‘BBB/Stable’ this week—which takes some tail-risk premium out of the currency. Neither is a game-changer on its own day to day, but together they temper the impulse to fade MXN on in-line inflation.

Looking ahead, the durability of today’s support hinges on three things. (1) Core-services disinflation: if the stickier services components start to soften, the market will price a bit more Banxico easing, narrowing the carry but endorsing the “soft-landing” story—likely a range-trade, not a trend break, for MXN. If services stay firm, Banxico’s glide path remains shallow, which is MXN-positive via carry. (2) U.S. rates and the dollar: continued slippage in U.S. yields keeps the backdrop friendly; a hawkish surprise from the Fed would quickly challenge MXN carry inflows. (3) Fiscal optics: Mexico’s draft budget points to gradual deficit improvement next year; any slippage—or renewed Pemex concerns—would be a headwind to the stable-outlook narrative that is quietly supporting local assets.”