USD/BRL: Bearish Chart Patterns to Result in More Selling

Ibeth Rivero

August inflation increased more than forecast in Brazil, and President Jair Bolsonaro appealed to the patriotism of vendors during the Covid-19 crisis. Brazil remains the third-most infected country globally with the second-highest death toll, trailing only the US. Brazil is in negotiations with Russia for 100 million doses of the Sputnik V vaccine, which has a production agreement with AstraZeneca and Oxford. The state of Bahia awaits government approval to import 50 million by March 2021. The USD/BRL remains in a bearish chart pattern but briefly paused its breakdown sequence.

The Force Index, a next-generation technical indicator, created a series of higher lows and eclipsed its descending resistance level, as marked by the green rectangle. Bullish momentum continues its general weakness and is unlikely to suffice for a conversion of its horizontal resistance level into support. This technical indicator maintains its position below the 0 center-line and risks a new collapse below its ascending support level with bears in control of the USD/BRL.

Following disagreements with his Minister of the Economy, Paulo Guedes, President Bolsonaro scrapped his plans to launch a new welfare program labeled Renda Brasil. It formed part of his 2020 re-election bid, but he could not agree on funding and announced the current program Bolsa Familia, would remain in place until 2022. After the USD/BRL pierced its short-term resistance zone located between 5.3222 and 5.3907, as marked by the red rectangle, it quickly resumed its corrective phase, assisted by a weak US Dollar.

Brazil additionally battles fires in the Amazon and the Pantanal, the world’s largest rainforest and largest wetland, which lost nearly 16% due to the blazes. The US is facing similar issues from California stretching to Washington. Both countries suffer from a combination of arson, deforestation, and climate change. Containing the disasters will be essential to the post-Covid-19 recovery. The descending Fibonacci Retracement Fan sequence is favored to keep the sell-off intact, pushing the USD/BRL back into its support zone located between 5.0803 and 5.1605, as identified by the grey rectangle.

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USD/BRL Technical Trading Set-Up - Breakdown Extension Scenario

Short Entry @ 5.2750

Take Profit @ 5.0850

Stop Loss @ 5.3300

Downside Potential: 1,900 pips

Upside Risk: 550 pips

Risk/Reward Ratio: 3.46

Should the Force Index resume its advance, with the descending resistance level providing temporary support, the USD/BRL could attempt to extend its reversal. Any advance from present levels will grant Forex traders a secondary selling opportunity. The US economy shows signs of exhaustion from its post-lockdown recovery, with distinct weakness ahead. The upside potential is limited to its 61.8 Fibonacci Retracement Fan Resistance Level.

USD/BRL Technical Trading Set-Up - Limited Reversal Scenario

Long Entry @ 5.3950

Take Profit @ 5.4800

Stop Loss @ 5.3300

Upside Potential: 850 pips

Downside Risk: 650 pips

Risk/Reward Ratio: 1.31

USD/BRL

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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