Brazilian Real Technical Analysis: USD/BRL Breakout Re-Tests 5.00

Brazilian Real Talking Points:

• USD/BRL has been in the midst of an aggressive bullish breakout after last week’s FOMC rate decision, which was the same day as a 50 bp rate cut out of Brazil.
• USD/BRL had held support at 4.85 ahead of that FOMC rate decision and that’s since led to a sizable bounce and the establishment of a fresh three-month-high. We’ve also seen that breakout pullback to test support at prior resistance, right around the 5.00 psychological level. This raises the question of bullish continuation within the context of a longer-term bearish pattern in the pair.

USD/BRL has been in the midst of a strong bullish breakout over the past two weeks, helped along by the FOMC rate decision on September 20^th. While the Fed didn’t announce any actual moves, they did reduce their expectation for cuts next year to two from four. That effectively helped to push longer-term rates in the US higher as markets priced-in fewer cuts that are now expected to begin later, largely in response to the continued strength in US inflation.

On that same morning, however, there was also a rate cut out of Brazil, helping to add an additional prod to that bullish move as there was both an atmosphere of USD-strength and BRL-weakness.

At this point from the daily chart, bulls retain control and there’s possible higher-low support showing at prior resistance at the 5.00 handle.

USD/BRL Daily Price Chart

Chart prepared by James Stanley; USD/BRL via Tradingview

USD/BRL Longer-Term

Taking a step back to the weekly chart adds a question mark behind this bullish move. At this point the weekly chart retains a descending triangle pattern, which is often approached with bearish aim. Those patterns do not denote timing, however, so it’s more of a matter of when support might get taken out or tested and at this point, given monetary policy in both the US and Brazil, it would appear that headwinds don’t favor that theme just yet.

But – they could – particularly if the US can soften inflation enough to get back into a growth-oriented trajectory. And if we do see that backdrop appear in the next year or so, there could be continued bearish drive in the USD/BRL pair as Brazilian growth rates gain favor again.

However – at this point with short-term bullish potential, the longer-term setup remains in question, and this directs attention to possible lower-high resistance on the weekly chart, if this shorter-term bullish theme can extend on the back of fundamental drive.

From the weekly chart below a couple of points of interest come into the picture. The current six-month high shows right around a prior point of support at 5.13 and this would be the next area for bulls to focus on. Above that we have another important swing point at 5.34 which is the current home of the March high in the pair.

USD/BRL Weekly Price Chart

Chart prepared by James Stanley; USD/BRL via Tradingview

--- written by James Stanley, Senior Strategist