Mexican Peso Strengthens Ahead of Banxico Decision

The Mexican peso strengthened to 17.2 per USD in the first week of May, reaching its strongest level since late February, as softer oil prices and easing inflation expectations weighed on the US dollar and supported market sentiment. Investors also awaited the Bank of Mexico’s monetary policy decision, with markets widely expecting another interest rate cut. Inflation in Mexico slowed for the first time this year to 4.45% in April from 4.59% in March and the economy contracted by 0.8% in Q1 2026, a sharper decline than forecasts for a 0.5% drop, signaling broad-based weakness across the economy. Manufacturing and services both posted steep contractions, while extractive industries also declined despite higher oil and silver prices.

The Mexican peso was at 17.5, holding near a three-week low as weak GDP data backed the Bank of Mexico's recent dovish position. The Mexican GDP contracted by 0.8% on the first quarter of 2026, a sharper contraction than expectations of a 0.5% decrease. The data indicated broad pressures on the economy as both manufacturing and services contracted sharply, while extractive industries slumped despite the increase in oil and silver prices. The result increased bets that Banxico is due to extend its cutting rate this year. The central bank unexpectedly delivered a rate cut in March despite evidence of sharp inflationary pressures, trimming the foreign exchange inflows from carry positions that have supported the Mexican peso this year.

The Mexican peso weakened to 17.5 per USD in the end of April, the lowest in three weeks, as geopolitical tensions strengthened demand for hard currencies. US President Trump signaled the blockade of tankers from Iran will remain in the near term, dimming expectations of an agreement to end the conflict and driving emerging markets to pivot toward harder currencies. The greenback was also supported by hawkish dissents in the Fed's rate hold. Also, Mexico's annual domestic inflation rate eased to 4.53% in the first half of April 2026, down from 4.63% in March, despite higher energy prices globally due to the Iran conflict. Core inflation also declined to 4.27%, the lowest in five months, falling from 4.46%. The easing inflation has raised expectations for a more dovish stance by the Bank of Mexico, contributing to the peso's depreciation against the US dollar.