MEXICAN PESO DIPS AS US INFLATION RISES, TRIMMING FED RATE CUT HOPES

• Mexican Peso depreciates by over 0.5% against US Dollar, reacting to unexpected inflation reacceleration in the US.
• US GDP growth for Q1 2024 falls short of forecasts at 1.6%, but a sharp increase in core PCE inflation to 3.7% boosts US yields.
• The rise in US yields and recalibrated Fed rate cut expectations drove USD/MXN to a weekly high of 17.38.

The Mexican Peso (MXN) fell during the North American session on Thursday, depreciating more than 0.5% against the US Dollar following the release of the Gross Domestic Product (GDP) in the United States (US) for the first quarter of 2024, which was weaker than expected. At the same time, the US Bureau of Economic Analysis (BEA) revealed that inflation for the same period increased sharply, spurring a jump in US Treasury yields, and weighed on the Mexican currency. At the time of writing, the USD/MXN trades at 17.18 after bouncing off a daily low of 17.01.

Thursday’s main driver for the Mexican Peso was US data. GDP for the first quarter missed estimates of 2.5% QoQ and expanded by 1.6%. By itself, that warranted US Dollar weakness, but digging deeper into the US BEA report, the core Personal Consumption Expenditure (PCE) price index for Q1 on a quarterly basis rose by 3.7%, higher than the expected 3.4% and up from 2%.

Market participants ditched the Mexican Peso as the USD/MXN rallied sharply, refreshing weekly highs at 17.38. US Treasury yields skyrocketed, while investors had priced out interest rate cuts by the US Federal Reserve (Fed) in 2024.

The data spooked investors of the emerging market currency. Speculation that the interest rate differential between Mexico and the US would likely shrink has spurred outflows from the Peso toward the Greenback.