USD/BRL forecast amid Fed and Brazil Central Bank divergence

The Brazilian real is hovering near its all-time low even as the divergence between the country’s central bank and the Federal Reserve continues. The USD/BRL exchange rate was trading at 6.00, a few points below the all-time high of 6.1155. It has risen by over 30% from its lowest point in 2021.

Brazil central bank hikes

The USD/BRL exchange rate continued its strong rally after the Brazilian central bank hiked interest rates by 100 basis points. The benchmark rate moved from 11.25% to 12.25%, the highest level since September last year.

The bank has been hiking interest rates in the past few months, moving them from a low of 10.25% to the current 12.25%. It has hinted that more hikes will continue, which will push the benchmark rate to 14.25% in the next few months. 

It has hiked these rates even as inflation continued rising. The most recent data showed that the headline Consumer Price Index (CPI) rose to 4.87%, its highest level since September last year. It has been in a slow increase after bottoming at 3.6% earlier this year.

The bank’s cuts are being supported by the fact that the economy is doing well. Data released last week showed that the economy expanded by 0.9% in the third quarter and by 4% on a year-on-year basis. This growth was mostly driven by government and consumer spending. It has also been helped by a record-low unemployment rate in the country. 

Some analysts have worried that the Brazilian economy was growing too fast, which put it at a risk of a hard landing. 

One reason for the robust growth has been government spending. President Lula has take note and decided to axe about $70 billion of the spending in the next two years. Economists believe that the cuts should be more, which will lower the deficit. The deficit remains at 9.5% of the GDP. 

Federal Reserve cuts

The USD/BRL pair has rallied even as the divergence between the Federal Reserve and the Brazilian central bank has continued.

The Fed has embarked on a rate cut cycle and has already slashed interest rates two times this year. It has slashed them by 0.75%, a trend that is expected to continue next week.

The US is cutting rates as signs show that the economy was slowing and that inflation was moving towards 2.0%. Data released this week showed that the headline consumer inflation data rose to 2.7%, while the core CPI remained unchanged at 3.3%.

The Fed has hinted that it will then embrace a more gradual pace of cutting interest rates in 2025. Economists worry that more cuts will stimulate inflation at a time when some of Trump’s policies are seen as being inflationary.

Trump has pledged to implement large tariffs and deport millions of illegal immigrants from the country. Such moves will be highly inflationary if they are carried out as planned.

USD/BRL technical analysis

USD/BRL chart by TradingView

The weekly chart shows that the USD/BRL exchange rate has been in a strong bullish trend in the past few months. It recently moved above the key resistance level at 5.9831, its highest level in May 2020.

The pair has moved above the 50-week and 200-week moving averages. Also, the Relative Strength Index and the MACD indicators have continued rising. It also formed an inverse head and shoulders chart pattern.

Therefore, the USD to BRL pair will continue rising as bulls target the next key resistance point at 6.50. The stop-loss of this trade will be at 5.6.