FX.co ★ Mexican Peso Weakens After Banxico

The Mexican peso weakened to over 19.50 per USD, falling from its seven-month high of 19.38 experienced on May 14th. This shift occurred as markets responded to Banco de México's (Banxico) decision to lower the interest rate by 50 basis points to 8.50% on May 15th. With headline and core inflation persisting near 3.9% and GDP growth in the first quarter limited to merely 0.2% following prior contraction, the Board determined that a slight reduction in rates was necessary to bolster the tenuous recovery while steering disinflation toward the targeted 3% mark. By signaling potential further reductions, Banxico has reduced the interest rate differential with the U.S. Federal Reserve, diminishing the peso’s yield advantage. This has prompted capital outflows, consequently strengthening the dollar against the peso in the short term.