USD/BRL forecast ahead of BCB, Fed decision, Brazil tariffs

The USD/BRL exchange rate remained in a tight range last week as market participants awaited the upcoming Federal Reserve and Brazilian Central Bank (BCB) interest rate decisions, as well as the potential escalation of the US-Brazil trade war.

The Brazilian real was trading at 5.5648 against the US dollar, up from this month’s low of 5.40. 

US and Brazil trade war escalation

The USD/BRL exchange rate will be in the spotlight as the August 1 deadline for Donald Trump’s ultimatum to Brazil arrives. Trump has warned that he will impose a 50% tariff on all Brazilian goods imported into the US on August 1. 

This decision was notable because, unlike other countries, the US has large trade surpluses with Brazil. The two countries traded goods worth over $92 billion last year, with the US exports totalling $49.7 billion. Its trade surplus was over $7.4 billion.

Trump has justified the tariff threat to the country’s political situation, where his ally, Jair Bolsonaro, is facing legal issues following the disputed election. He called it unjust and equated it with his own legal turmoil. 

A trade war between the US and Brazil will have major implications, especially for the latter country. For example, São Paolo’s governor as warned that it will hit his state’s GDP by 2.7%. 

Brazil and Fed interest rate decisions

The USD/BRL pair will also react to the upcoming interest rate by the Brazilian Central Bank. Analysts expect the bank will pause its ongoing rate hikes as it observes the impact of the upcoming tariffs. 

The bank has been in a rate-hiking cycle since last year, when they stood at 10.5%. It has brought them to 15% as its battle against inflation accelerated. The bank anticipates that inflation will pose a significant challenge.

The Federal Reserve will also deliver its interest rate decision on Wednesday. Economists expect the bank to leave rates unchanged between 4.25% and 4.50% in this meeting.

Officials have resisted pressure from Donald Trump, citing the steady inflation and the impact of his tariffs. Recent data showed that the headline consumer price index (CPI) rose to 2.7% in June, while the core figure jumped to 2.9%.

The Fed is expected to start cutting rates either in September or October this year. Such a move means that the spread betweenthe US and Brazil’s interest rates will widen, creating a positive carry trade opportunity. 

USD/BRL technical analysis

The daily chart shows that the USD/BRL exchange rate has been under pressure in the past few months. It has dropped from the year-to-date high of 6.3130 to the current 5.56. 

The pair has already formed the bearish death cross pattern as the 50-day and 200-day moving averages crossed each other. It has also formed a head-and-shoulders pattern, a popular continuation sign. 

Therefore, the pair will likely continue falling as sellers target the key support at 5.4050, its lowest point this month. A move below that level will point to more downside, potentially to the support at 5.3163, the 61.8% retracement point.