Mexican Peso Holds High After Banxico Decision

The Mexican peso rose to 17.2 in May, approaching the strongest in two years after the Bank of Mexico stated that it was done with its interest-rate cutting cycle. The central bank reduced its benchmark policy rate by 25bps to 6.5% in a narrow decision, compared to expectations of more consensus for a cut, but signaled that it concluded the easing cycle that began in March of 2024. Banxico delivered the clear statement as elevated energy prices due to the war in the Middle East threaten inflation expectations in the Mexican economy. This supported the continuation of the peso carry trade, supporting the currency despite downside risks to growth. The last GDP data pointed to a sharper contraction than expected of 0.8% in Q1.

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.