USD/BRL forecast ahead of the Fed and Brazilian central bank decisions

The Brazilian real continued its strong rally this week, reaching its highest level since May 2024 as the US dollar sell-off gained momentum. The USD/BRL exchange rate has dropped in the last five consecutive weeks and is down by 18% from its highest level since December 2024.

Brazilian real surges ahead of the central bank decision 

The USD/BRL exchange rate continued falling this week as investors waited for the upcoming Brazilian central bank decision, which will come out on Thursday morning.

The decision comes two days after the statistics agency published a strong inflation report. 

The report showed that the annual inflation rose in early January, with the headline figure rising 4.50%, slightly lower than the sector median of 4.52%. This increase was largely because of the rising food and beverage prices.

More data showed that inflation expectation has continued rising in the past few months, a move that will put pressure on the country’s central bank.

Economists expect that the central bank will leave interest rates unchanged at 15% for the second consecutive meeting. Before that, the bank hiked rates from a low of 10.5% in August 2024.

A survey released this week estimated that the bank will cut interest rates to 12.5% by the end of the year and an additional 275 basis points through 2029.

The Brazilian real has done better than expected despite the ongoing trade jitters between the United States and Brazil. Donald Trump implemented a large tariff on most goods coming from the country as he protested the arrest and jailing of President Bolsonaro.

On the positive side, the country has benefited from the ongoing trade conflict between the US and China. It is widely seen as a better alternative to the US in terms of agricultural exports to China.

Federal Reserve interest rate decision ahead 

The USD/BRL exchange rate continued falling as traders waited for the upcoming Federal Reserve interest rate decision.

Economists expect the bank to leave interest rates unchanged between 3.50% and 3.75%. It will be the first time that the bank has left rates unchanged in the last three meetings.

The most recent data showed that the US economy was doing well, with the GDP growth coming in at 4.4% in the third quarter. Inflation has largely stabilized, while the labor market has started to improve.

USD/BRL technical analysis

USDBRL chart | Source: TradingView

The weekly timeframe chart shows that the USD to BRL exchange rate has been in a strong bearish trend in the past few months. It has dropped from a high of 6.30 in 2024 to the current 5.18. 

The pair has recently crossed the important support at 5.2642, its lowest level in September and November last year. It has moved below the 50-week and 200-week Exponential Moving Averages (EMA).

The Percentage Price Oscillator (PPO) has remained below the zero line. Also, the Relative Strength Index (RSI) has dropped below 50 and is pointing downwards.

Therefore, the most likely scenario is where the pair continues falling, with the next key support being at 4.50. A move above the resistance level at 5.2642 will invalidate the bearish outlook,