USD/BRL forecast as the Fed and Brazil Central Bank diverge

The USD/BRL exchange rate moved sideways after the latest Fed and Brazilian central bank decisions. The pair was trading at 4.96, where it has been in the past few days. It has jumped by more than 3% from its lowest point in January.

Brazil and Fed rate decisions

The Federal Reserve and the Brazilian central banks continued to diverge in their first monetary policy meetings of the year. In the US, the Fed decided to maintain its interest rates steady between 5.25% and 5.50% as it has done in the past few meetings. It also hinted that it will hold them at this level for a while as it observes the economic trends.

Some analysts see no reason for the Fed to start cutting rates this year. Besides, the economy is still firing on all cylinders, helped by the robust consumer and government spending. It expanded by 3.3% in the last quarter, higher than the expected 2.0%. 

Inflation is also at an elevated level as it rose by 3.4% in December, much higher than the target of 2.0%. Consumer confidence and manufacturing activity are still robust. Therefore, most analysts believe that the Fed will maintain rates steady until at least June.

Meanwhile, the Brazilian central bank continued cutting interest rates to stimulate growth as key commodities waver. It slashed interest rates by 50 basis points from 11.75% to 11.25% as was widely expected.

While Brazil’s economy is still growing, the prices of some of its key exports has dropped in the past few months. The price of crude oil is still lower than its 2023 high while iron ore, soybeans, and corn have retreated. Inflation has also continued falling and the officials expect more rate cuts. The statement said:

“If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings.”

USD/BRL technical analysis

USD/BRL chart by TradingView

The daily chart shows that the USD to BRL exchange rate remained in a tight range in the past few days. It has remained slightly above the 50-day and 25-day Exponential Moving Averages (EMA). It has moved above the ascending trendline. The pair has moved slightly above the Ichimoku cloud.

It has also formed a head and shoulders pattern. Therefore, the pair will likely have a bearish breakout, with the next point to watch being at 4.810, its lowest level this year. The alternative scenario is where it rebounds and moves to the key resistance at 5.2196, its highest point in October last year.