USD/BRL forecast as Brazil Foreign Direct Investments (FDI) sinks

The USD/BRL exchange rate remained in a consolidation phase on Monday as investors embraced a risk-on sentiment. The pair was trading at 4.900, where it has been stuck at in the past few days. It has dropped by more than 6.16% from its highest point in November. 

Brazil FDI sinks

The USD to BRL exchange rate has been in a downtrend in the past few months as the US dollar index (DXY) has retreated. The index, which tracks the greenback against a basket of other currencies, has dropped from $107.3 to $103.50.

It has crashed hard, helped by the ongoing risk-on sentiment as investors bet that the Federal Reserve will start cutting interest rates in the coming months. That’s because America’s inflation has fallen sharply in the past few months.

The most recent data showed that the headline Consumer Price Index (CPI) dropped from 3.7% in October to 3.2% in November. Durable goods inflation has dropped in the past six straight months even as services remains at an elevated level.

Jerome Powell, the head of the Federal Reserve, attempted to pushback against these hopes in a statement on Friday. In it, he warned that the bank could hike interest rates since it believes that inflation remains above its target of 2%.

The USD/BRL pair also moved sideways after the latest Brazil FDI data. According to the country’s central bank, Foreign Direct Investments (FDI) dropped again in October. It dropped to $3.1 billion, lower than the median estimate of $4.6 billion.

Brazil’s FDI has dropped in the past four straight months. It peaked at almost $9.2 billion in August 2022 and bottomed at $1.8 billion in July this year. FDI is an important measure of an economy because it leads to more foreign currencies.

Meanwhile, Brazil’s balance of trade has been in a downtrend after peaking at over $11.6 billion in July. It dropped to over $8.7 billion in November. 

USD/BRL technical analysis

USD/BRL chart by TradingView

The daily chart shows that the USD to Brazilian real pair has moved sideways in the past few days. Along the way, the pair has dropped below the 50-day and 25-day Exponential Moving Averages (EMA). Most importantly, it has formed a bearish flag pattern. In price action analysis, this pattern is one of the most bearish signs.

Therefore, there is a likelihood that the USD/BRL pair will have a bearish breakout in the coming weeks. If this happens, the next point to watch will be at 4.8. The stop-loss of this pair will be at 5.0.