The USD/BRL exchange rate has retreated in the past few months as the US dollar has crashed and the Brazilian central bank has maintained its hawkish tone. The pair retreated from the year-to-date high of 6.3365 in December last year to the current 5.78. So, what is the USDBRL forecast ahead of the upcoming Fed and Brazil interest rate decision?
Brazil central bank decision
The USD/BRL pair has retreated in the past few months after the Brazilian central bank embarked on a rate hiking phase. It hiked rates to 13.35% in the last monetary policy meeting, the highest level since 2023. It has hiked rates in the last five consecutive meetings.
The central bank meets this week, and analysts anticipate it will continue with the trend in this meeting. It may hike rates by 13.75% to track the highest level during the COVID-19 pandemic.
The Brazilian central bank has hiked rates because of the elevated inflation rate. Data released this month showed that the headline Consumer Price Index (CPI) rose from 4.56% in January to 5.0% in February. It has risen from last year’s low of 3.69%.
Interest rate hikes help to slow a country’s inflation rate by reducing spending and encouraging savings in the local currency.
Read more: USD/BRL forms a shooting star pattern as Brazilian real rebounds
Brazil to benefit from US-China trade war
The USD/BRL exchange rate has crashed in the past few months as the country is set to become a key beneficiary of the ongoing trade war between China and the USA.
Donald Trump has implemented large tariffs against Chinese imports, pressuring Beijing to retaliate. China has retaliated by imposing large tariffs on US goods, especially in the agricultural sector where Brazil excels.
Therefore, China will likely boost Brazilian imports such as soybeans and corn in the next few years. The onus will be on Brazil to boost production of these products.
Historically, Brazilian corn and soybeans have been cheaper than those from the United States because of the low production cost. This trend will likely continue in the coming months as tariffs on US corn and soy rise.
Federal Reserve decision
The USD/BRL exchange rate will also react to the upcoming Federal Reserve interest rate decision scheduled for Wednesday this week.
Economists believe that the Fed will leave interest rates intact as it signaled in the last meeting. The bank will then point to at least three more interest rate cuts later this year because of the risks the US finds itself in.
Donald Trump has risked the US having a self-inflicted recession by adding tariffs on imported goods from other countries.
Brazil may be spared from most of these tariffs because the US is expected to move to a trade surplus with the country.
USD/BRL technical analysis
USDBRL chart by TradingView
The daily chart shows that the USD to BRL exchange rate has been in a strong downtrend in the past few months. It dropped from a high of 6.3128 in December to 5.7452 today.
The pair has moved below the 23.6% Fibonacci Retracement level at 5.9327. It also retreated below the 50-day and 100-day Exponential Moving Averages (EMA), and is hovering at the 38.2% retracement level.
The Relative Strength Index (RSI) has moved below the neutral point at 50. Therefore, the pair will likely continue falling as sellers target the next point at 5.50, the 50% retracement level. A move above the resistance level at 5.7 will invalidate the bullish outlook.
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