USD/BRL analysis as Brazil central bank slashes interest rates

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on Aug 3, 2023
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  • The USD/BRL pair rose this week after Brazil’s central bank decision.
  • It caught the market by surprise by slashing interest rates by 0.50%.
  • The bank has diverged with the mildly hawkish Federal Reserve.

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The USD/BRL exchange rate drifted upwards after the surprise interest rate decision by the Brazilian central bank. It rose to a high of 4.82, the highest point since July 21st as the bank diverged from the Federal Reserve.

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Brazil central bank cuts rates

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The USD to Brazilian real exchange rate rose after the Fed and Brazil’s central bank diverged. In its decision on Thursday, the country’s central bank decided to slash interest rates by 0.50% to 13.25%. Economists were expecting the bank to leave interest rates unchanged at 13.50%.

Therefore, Brazil became the first country to slash interest rates during this cycle. Banks like the Federal Reserve and the ECB decided to hike interest rates by 0.25% last week. And analysts believe that the Bank of England (BoE) will do the same on Thursday.

In a statement, the Banco Central do Brasil said that the rate cut was necessary in a bid to stimulate the economy. It also cited the fact that inflation dropped to its expected range a few months ago. The most recent data showed that the country’s inflation dropped to 3.2% in June afer soaring to double-digits a few months earlier.

There are signs that Brazil’s economy is slowing. For example, the most recent numbers showed that the country’s retail sales and manufacturing output dropped. Still, the agricultural sector will help to offset weaknesses in other areas. Analysts at Citigroup believe that the economy will growby 3.2% this year

The next catalyst for the USD/BRL exchange rate will be the upcoming US non-farm payrolls (NFP) data. Economists expect the numbers to show that the job market was stable in July with the unemployment rate remaining at 3.6%.

USD/BRL technical analysis

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USD/BRL

USD/BRL chart by TradingView

The USD/BRL exchange rate made a strong recovery this week, helped by the strong US dollar index (DXY). It rose to a high of 4.82 as the DXY jumped to the highest level in weeks. On the four-hour chart, the pair moved above the 25-day and 50-day exponential moving averages while the Relative Strength Index pointed upwards.

Therefore, from a monetary policy standpoint, the pair will likely continue rising in the coming weeks because the Fed is not expected to slash rates this year, as we wrote here. As such, the pair could rally and retest the resistance at 4.9475, the highest point on July 6.

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