Introduction to the Brazilian Real’s Recent Surge
The Brazilian real has been on a strong rally, reaching its highest level since May 2024. This surge is largely attributed to the US dollar sell-off, which has gained momentum. The USDBRL exchange rate has dropped in the last five consecutive weeks and is down by 18% from its highest level since December 2024.
Brazilian Real Surges Ahead of Central Bank Decision
The USDBRL exchange rate continued falling this week as investors waited for the upcoming Brazilian central bank decision, which will be announced on Thursday morning. This decision comes two days after the statistics agency published a strong inflation report, showing that the annual inflation rose in early January, with the headline figure rising 4.50%. This increase was largely due to rising food and beverage prices.
Inflation Expectations and Interest Rates
More data showed that inflation expectations have continued rising in the past few months, putting pressure on the country’s central bank. Economists expect that the central bank will leave interest rates unchanged at 15% for the second consecutive meeting. Before that, the bank hiked rates from a low of 10.5% in August 2024. A survey released this week estimated that the bank will cut interest rates to 12.5% by the end of the year and an additional 275 basis points through 2029.
Impact of Trade Tensions and Conflicts
The Brazilian real has done better than expected despite the ongoing trade jitters between the United States and Brazil. Donald Trump implemented a large tariff on most goods coming from the country as he protested the arrest and jailing of President Bolsonaro. On the positive side, the country has benefited from the ongoing trade conflict between the US and China, as it is widely seen as a better alternative to the US in terms of agricultural exports to China.
Federal Reserve Interest Rate Decision Ahead
The USDBRL exchange rate continued falling as traders waited for the upcoming Federal Reserve interest rate decision. Economists expect the bank to leave interest rates unchanged between 3.50% and 3.75%. It will be the first time that the bank has left rates unchanged in the last three meetings. The most recent data showed that the US economy was doing well, with the GDP growth coming in at 4.4% in the third quarter. Inflation has largely stabilized, while the labor market has started to improve.
USDBRL Technical Analysis
The weekly timeframe chart shows that the USD to BRL exchange rate has been in a strong bearish trend in the past few months. It has dropped from a high of 6.30 in 2024 to the current 5.18. The pair has recently crossed the important support at 5.2642, its lowest level in September and November last year. It has moved below the 50-week and 200-week Exponential Moving Averages (EMA). The Percentage Price Oscillator (PPO) has remained below the zero line. Also, the Relative Strength Index (RSI) has dropped below 50 and is pointing downwards.
Conclusion
In conclusion, the Brazilian real’s recent surge is attributed to the US dollar sell-off and the country’s strong economic performance. The upcoming central bank decision and Federal Reserve interest rate decision will be crucial in determining the future direction of the USDBRL exchange rate. Based on technical analysis, the most likely scenario is that the pair will continue falling, with the next key support being at 4.50. A move above the resistance level at 5.2642 will invalidate the bearish outlook. As the market continues to evolve, it is essential to keep a close eye on these developments and their impact on the Brazilian real.
