USDBRL should reflect interest rate decisions in Brazil, the United States, England and Japan

Bullish Factors

• The Federal Reserve is expected to take a firm stance against inflation and release its projections of interest rates higher than the median of market estimates, reinforcing the perception that interest rates will stay higher for longer in the US and strengthening the dollar.
• The Monetary Policy Committee should reduce the basic interest rate (Selic) by 0.50 p.p., reducing the country's interest differential to other economies and reducing the inflow of investments into the country, weakening the BRL.

Bearish Factors

• The Bank of England is expected to raise interest rates even in the face of economic stagnation in the country, increasing concerns about an economic slowdown in Europe and strengthening the dollar.
• The Bank of Japan is expected to maintain its ultra-loose monetary policy unchanged, contributing to the strengthening of the dollar by contrast.

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Week in review

The USDBRL ended the week lower, closing Friday's session at BRL 4.872, with a weekly decline of 2.2%, a monthly decline of 1.6%, and an annual decline of 7.7%.   Meanwhile, the dollar index closed Friday's session higher for the ninth consecutive week, trading at 105.3 points, with a weekly change of +0.3%, a monthly change of +1.7%, and an annual change of +2.0%.  The FX market reacted to the release of inflation data in Brazil and the United States, strong US retail sales data, and the European Central Bank's monetary policy decision.

USDBRL and Dollar Index (points)

Source: StoneX cmdtyView. Design: StoneX

The most important event: US interest rate decision

Expected impact on USDBRL: bullish

Investor attention this week is expected to focus on the monetary policy decision of the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed).  There is almost consensus that the Committee will keep interest rates unchanged in the range of 5.25% to 5.50% per annum. The data for August has generally followed the same trend as recent months, suggesting moderation in core inflation while economic activity and the labor market continue to show strength.  The Fed officials' speech is also expected to remain similar, reinforcing a vigilant stance against possible inflationary risks, saying it is too early to conclude that the price stabilization process is guaranteed and that it will not hesitate to make further rate hikes if new economic data can point to a reacceleration of prices. This stance should provide more flexibility for upcoming FOMC decisions, harboring both the possibility of ending the monetary tightening cycle if inflation continues to moderate and the possibility of taking a firmer stance in unfavorable data.

The release of the FOMC members' Summary of Economic Projections, especially the "dot plot" with interest rates deemed appropriate by Committee members for the end of 2023, 2024, 2025, and 2026, will also be important.  Lately, the Federal Reserve officials' discourse has been firmer than the forecasts made by market players, so, likely, these projections will also come above the median estimates of analysts, predicting, for example, another rate hike in 2023. Fed Chairman Jerome Powell's news conference is also an event that could influence the macroeconomic debate for months. As already stated, Powell should repeat the discourse that inflationary risks are still relevant, and the institution remains on the lookout for the need for further rate hikes. It should also state that even with the recent moderation in prices, the heated employment and growth data may represent a sufficient inflationary risk to justify further rate increases and warn of the recent upward trend in international oil prices.

Bets for the Federal Reserve's Sept. 20 Interest Decision

Source: CME FedWatch Tool. Design: StoneX.   Probabilities in the interest futures market concerning September 15, 2023

History of the US interest rate and bet with greater probability on the interest futures market

Source: CME FedWatch Tool. Design: StoneX.   Probabilities in the interest futures market concerning September 15, 2023

Decision of the Monetary Policy Committee (Copom)

Expected impact on USDBRL: bullish

The Central Bank of Brazil's Monetary Policy Committee (Copom) should reduce the basic interest rate (Selic) by 0.50 p.p., from 13.25% p.a. to 12.75% p.a., as signaled in the last decision of the collegiate and widely expected by analysts. Investors should look to the statement of the decision for details on the future trajectory of interest rates in the country amid a more adverse external scenario and some points of internal concerns. On the eve of the decision, the Central Bank's Economic Activity Index (IBC-Br) for July should be released, considered a preview of the Gross Domestic Product, and the degree of warming (or idleness) of the economy should be one of the highlights in the risk assessment statement. The latest economic data have shown above-anticipated activity and can be considered an inflationary risk factor, which may eventually reduce the easing space for the monetary authority.

History of the Selic rate and median of financial institutions' expectations (Focus)

Source: Central Bank of Brazil. Design: StoneX.

Interest decisions in England and Japan

Expected impact on USDBRL: bearish

This week, several major central banks will make monetary policy decisions, including Japan, England, Switzerland, Sweden, Norway, and others.  The expectation for the Bank of England (BoE) is a 0.25 percentage point increase in its basic interest rate, rising from 5.25% per annum to 5.50% per annum, with doubts about whether this will be the last adjustment due to a difficult impasse between still-high inflation and weak economic data.  Meanwhile, the Bank of Japan is expected to maintain its ultra-loose monetary policy and keep its interest rate unchanged at -0.10% per annum, the same level since February 2016.  However, reflecting recent comments by the institution's president, Kazuo Ueda, the statement is expected to be slightly modified to include the possibility of policy changes in the future if inflation and wage data remain above the central bank's target for an extended period.

Key Indicators

Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.

Analysis by: Leonel Oliveira Mattos (leonel.mattos@stonex.com), Alan Lima (alan.lima@stonex.com), and Vitor Andrioli (vitor.andrioli@stonex.com). Translation by Rodolfo Abachi (rodolfo.abachi@stonex.com).

Financial editor: Paul Walton (paul.walton@stonex.com).