The Brazilian real continued its strong upward trend this week, reaching its highest level since May 2024. The USD/BRL pair was trading at 5.1537 on Wednesday, much lower than last year's high of 6.3063.
Brazilian Real Gains Momentum
The USD/BRL exchange rate has been in a strong downward trend in the past few months as the Brazilian economy has done well.
The most recent macro data showed that the unemployment rate has continued falling, moving from 7% in March 2025 to 5.1% in December.
At the same time, the headline Consumer Price Index (CPI) dropped to 4.4% in January from last year’s high of 5.5%. Core inflation, which excludes the volatile food and energy prices, dropped to 4.72% from last year's high of 5.26%.
The USD/BRL pair has also retreated because of the ongoing divergence between the Federal Reserve and the Brazilian central bank.
While the Federal Reserve has delivered three interest rate cuts this cycle, Brazil’s bank has delivered several interest rate hikes, reaching 15% from the 2024 low of 10.5%. Analysts expect that the central bank may continue hiking interest rates in the coming months.
The ongoing Brazilian Central Bank and Federal Reserve interest rate divergence has led to a perfect carry trade opportunity, where investors borrow from a low-interest-rate country and invest in a high-interest-rate one. In this case, the spread between the two has continued to widen in the past few months.
USD/BRL Technical Analysis
The weekly timeframe chart shows that the USD/BRL exchange rate has been in a strong downward trend in the past few months, moving from a high of 6.3063 in December 2024.
It has now plunged below the 61.8% Fibonacci Retracement level at 5.2490. This price coincides with the lowest level in September and November last year.
The pair has formed a mini death cross as the 50-week and 100-week Exponential Moving Averages (EMA) crossed each other. Also, the Average Directional Index (ADX) has risen to 16, its highest level since June last year. A rising ADX ks is a sign that the downtrend is gaining momentum.
Therefore, the pair will likely continue falling, potentially to the key psychological level at 5. A move above the key resistance level at 5.2642 will invalidate the bearish outlook.