Brazilian Real Technical Analysis: USD/BRL, EUR/BRL

Brazilian Real Talking Points:

• The Brazilian Real showed weakness against both the Euro and US Dollar over the past week, although the breakout in USD/BRL has shown in a cleaner format.
• As rate hike odds continue to monitor US data for signs of a possible hike in September, Copom has already started to cut rates and there’s the prospect of more cuts on the horizon. This puts the fundamental direction of each currency in USD/BRL in differing directions and that’s allowed for a bullish breakout to continue to run.

Copom kicked off the cutting cycle for Brazil earlier this month and the Brazilian Real continues to show weakness against both the US Dollar and the Euro.

The cleaner setup over the past week has been in USD/BRL. I had discussed the breakout setup last week as USD/BRL had held resistance at a key trendline following a grinding week of price action. But, notable was the fact that price held the bounce from the prior week, which deductively was a bullish sign despite the fact that price remained at the same zone of resistance that was in-play in early-June.

The USD/BRL breakout started to take hold on Monday and extended on Tuesday, with price eventually pushing up to the psychological 5.00 handle before grinding into the end of the week. At this point we now have a fresh higher-high to go along with last week’s higher-low, and this keeps bulls in the driver’s seat on the pair. That prior zone of resistance running from 4.9224-4.9500 now functions as support potential into next week.

USD/BRL Daily Price Chart

Chart prepared by James Stanley; USD/BRL via Tradingview

EUR/BRL

The Euro hasn’t had the same bullish appeal as the US Dollar of late, which can be seen in the EUR/USD pair that’s fallen back-below the psychological level at 1.1000. At the core of that move is rate expectations out of the two economies, and with US data showing greater resilience than what’s recently shown in Europe there’s simply been more drive for the USD than the Euro.

But, last week’s economic data out of Europe wasn’t terrible:  GDP came in above expectations and core inflation printed right at the expected 5.5%, so we can’t quite wipe away rate hike potential from the European Central Bank at their September rate decision.

EUR/BRL similarly posted a breakout as driven by a strong move on Monday and Tuesday, but the context here is a bit more subdued as EUR/BRL remains inside of the resistance that was set in late-May as price continues to hover in the area that held resistance in July.

The support looked at last week at 5.3469 did hold the lows so this retains some scope for bulls, as a continued hold above that level does keep a sequence of higher-highs and higher-lows alive, which could keep the door open for a further bullish push, but that will likely need some help from European economic data.

Until clearer evidence is seen of the ECB softening or the possibility of rate cuts in Europe, the fundamental push on the pair could remain biased to the long side. But, as looked at above in USD/BRL, given the recent push towards USD strength against the Euro, USD/BRL may make for a more compelling argument than what shows below in EUR/BRL.

EUR/BRL Daily Price Chart

Chart prepared by James Stanley; EUR/BRL via Tradingview

--- written by James Stanley, Senior Strategist