The Brazilian real continued its strong surge on Wednesday as it soared to its highest point since October 8 last year. The USD/BRL exchange rate plunged to a low of 5.4935, down by 13% from its highest point in December. Focus now shifts to the upcoming Brazilian and US interest rate decisions.
Brazil’s interest rate decisions
One of the top catalysts for the USD/BRL exchange rate is the upcoming interest rate decision by the Brazilian central bank.
This decision comes at a time when the economy is doing relatively well this year, as it takes advantage of the ongoing US and China trade conflict.
Recent data shows that the economy expanded by 1.4% in the first quarter in line with what most analysts were expecting. It was higher than the fourth-quarter growth of 0.1%.
The Brazilian economy has received a boost from the agricultural sector as the country has received adequate rain this year. As a result, analysts anticipate that the economy will expand by 2.3% this year.
Meanwhile, Brazil’s inflation has retreated in the past few months. The headline Consumer Price Index (CPI) eased to 5.32% in May this year, the lower side of the average analysts’ estimates. Inflation has dropped because of the relatively cheaper food than expected.
Another report released on Tuesday revealed that Brazil’s annual inflation will retreat to 5.2% at the end of the year, according to a central bank survey. The inflation figure will be higher than the central bank target of 3%.
The Brazilian central bank has been hawkish in the past few months. It has hiked interest rates from 10.5% in October last year to 13.25%, and analysts anticipate that it will pause in this meeting.
Federal Reserve decision
The USD/BRL exchange will react to the upcoming Federal Reserve interest rate decision. Economists expect the bank to leave rates unchanged between 4.25% and 4.50%. It will likely maintain a wait-and-see attitude as it watches the impact of Trump’s tariffs on the economy. A Deutsche Bank analyst said:
“The wait-and-see approach has served them well up until this point. Why deviate from it now when there’s no pressing reason to do so and with still upside risk to the inflation outlook?”
There are signs that the economy is not doing well. Data released on Tuesday showed that the US retail sales plunged in May as the impact of tariffs continued.
Another report showed that the US industrial and manufacturing production worsened in May.
Last week’s inflation data showed that the headline consumer price index (CPI) rose from 2.3% in April to 2.3% in May, while the core CPI remained unchanged at 2.8%.
Inflation may continue soaring now that the shipping and crude oil prices jumped as the crisis in the Middle East has escalated. Brent and West Texas Intermediate (WTI) crude oil prices have jumped to over $70.
Therefore, the Fed will likely hint that interest rates will remain higher for longer than expected.
USD/BRL technical analysis
The daily chart shows that the USD/BRL exchange rate has been in a strong downtrend after peaking at 6.3130 in December. It has formed a head-and-shoulders pattern, a popular bearish reversal sign.
The pair has moved below the lower side of the neckline. It also moved below the 50-day and 100-day Weighted Moving Averages (WMA).
Further, the Relative Strength Index (RSI) and the MACD indicators have continued falling.
Therefore, the USD/BRL exchange rate will likely continue falling as sellers target the psychological point at 5.00. A move above the resistance at 5.8 will invalidate the bearish outlook.
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