FX Weekly Overview (Brazil Issue)

FX rates expected to reflect GDP and PCE in the United States, Federal Reserve minutes, and volatility of the Japanese yen

• Holiday week in Brazil and the US

  The coming week will be marked by holidays in both Brazil and the United States, reducing the number of trading days in the FX market.

• In the US, Monday (16) marks the Presidents' Day holiday, during which there will be no trading on the US market.
• In Brazil, due to Carnival and Ash Wednesday, no trading is expected to take place between Monday (16) and 1:00 p.m. on Wednesday (18).
• With holidays in both countries, trading volume throughout the week tends to be reduced, and some economic indicators may be postponed until other dates.
• Due to the shortened calendar, the posting of FX reports will resume at the close of Wednesday's session.

The week in review

• The most anticipated data for the week, the Payroll Report, indicated expansion in the US labor market and a drop in the unemployment rate, with results exceeding investor estimates.
• In addition to employment data, US Consumer Price Index (CPI) figures pointed to a slowdown in inflation, with lower-than-expected growth.
• As such, the resilient labor market and slowing price increases curben the need for further interest rate cuts by the Federal Reserve in the short term, which supported the greenback's performance during the week.
• Even so, the Dollar Index (DXY) fell over the week, influenced mainly by news that the Chinese government was recommending that the country's banks reduce their exposure to US government bonds.
• At the national level, the Broad National Consumer Price Index (IPCA) showed stability in monthly price variations, but accumulated a slight increase over the last 12 months.
• New economic activity data in Brazil pointed to a slowdown in the service and trade sectors in December, which tends to strengthen bets on a faster cycle of interest rate cuts in the country.

USDBRL and Dollar Index (points)

USDBRL Variations

Daily: +0.50% | Weekly: +0.12% | Monthly: -0.42% | Annual: -15.43% | 12 months: -9.42%

Dollar Index Variations

Daily: -0.05% | Weekly: -0.75% | Monthly: -0.14% | Annual: -10.39% | 12 months: -9.71%

Key Focus: Q4 GDP and inflation data in the US

Expected Impact on USDBRL: Bullish

Over the week, the market will remain focused on the release of US economic indicators.

• The spotlight will be on the first reading of Q4 2025 GDP and the December Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve's preferred inflation metric.

Q4 GDP: The median of projections points to annualized growth of 2.7% in the fourth quarter, slowing down from the 4.4% growth seen in Q3, which was the highest in two years.

• If confirmed, the result would still indicate solid performance, albeit at a more moderate pace than in the last two quarters.
• The data should also confirm that the US economy ended 2025 at a faster-than-expected pace, supported by resilient consumption and less restrictive financial conditions.
• The Payroll report released on Wednesday reinforced this view, with better-than-expected data indicating that the US economy remains resilient, easing fears of recession that have been raised throughout the year.

Personal Consumption Expenditures (PCE): The inflation indicator most closely monitored by the Federal Reserve will be crucial in guiding expectations about the future trajectory of monetary policy.

• Projections suggest that the indicator may show stronger inflationary pressures than those captured in recent Consumer Price Index (CPI) readings, with leading indicators (such as food and producer prices) pointing to upside risks.
• Last Friday (13), the CPI showed a slowdown to 2.4% in 12 months, the lowest figure since May 2025.
• Analysts point out that the difference in weightings between the two indices may result in a stronger PCE, as the index places greater weight on categories that are currently experiencing more pronounced price increases.
• At the press conference following the FOMC meeting in January, Jerome Powell stated that estimates based on the CPI indicate that the full PCE rose 2.9% year-on-year in December, up from 2.8%, while the core likely advanced 3.0%, up from 2.8% in the previous month.
• However, Powell emphasized that these higher readings mainly reflect inflation in goods driven by tariffs and one-off factors, not necessarily strong demand.

Watching for the next interest rate cut: The Fed's December projections indicated another cut in 2026, but officials have emphasized that such a move will depend on further progress toward the inflation target, especially given the stronger performance of the labor market.

• Powell reiterated that decisions will be made on a meeting-by-meeting basis, guided by data and the balance of risks.

Why this matters: If this week's data confirms that the economy remains strong while inflation slowly decelerates, the Federal Reserve has room to continue assessing data conditions and maintain a more cautious stance before resuming interest rate cuts.

• This environment tends to push up Treasury yields and, consequently, strengthen the dollar globally.

 

FOMC minutes may provide further clues on monetary policy direction

Expected Impact on USDBRL: Bullish

This week will see the release of the minutes from the last meeting of the Federal Open Market Committee (FOMC), held at the end of January. The US interest rate was kept in the range of 3.5% to 3.75% p.a.

• This decision was not unanimous, with two directors voting for an interest rate cut.
  In its statement following the decision, the Fed took a more cautious stance, signaling a wait-and-see approach to the US economy in the coming months, with an emphasis on the impacts of the government's tariff policy.
• In addition, the statement indicated that job creation remained low in the country, while the unemployment rate showed signs of stability. Inflation, meanwhile, would remain “somewhat high.”

• As the document is published three weeks after the decision, the information will already be out of date, especially after the data that was recently released.
• January's payroll figures showed a number of job openings created well above expectations. Consumer inflation, on the other hand, came in below expectations. As a result, the current scenario may already present different interpretations compared to what was observed when the last interest rate decision was made.

 

Why this matters: Even with the delay in disclosure and new inflation and labor market indicators, the document may provide further clues as to how committee members interpret the country's next monetary policy steps.

• The interest rate differential is one of the main factors influencing the US dollar/Brazilian real exchange rate. As the Selic rate is expected to enter a downward cycle, potential changes in US interest rates should also be closely monitored.

 

Volatility of the yen

Expected Impact on USDBRL: Bearish

Throughout the week, the yen appreciated sharply against the dollar, mainly reflecting the result of Prime Minister Sanae Takaichi's victory in the lower house of the country's parliament.

• With the majority in Parliament, Takaichi, who advocates greater fiscal action by the government, should encounter less resistance in passing her bills.
• Although a more expansionary fiscal policy tends to be positive for economic activity, it can also intensify inflationary pressures, anticipating possible further interest rate hikes by the Bank of Japan (BoJ).
• Since December last year, the Bank of Japan (BoJ) has set the base interest rate at 0.75% p. a., the highest level in over 30 years.

Why this matters: Fiscal expansion in Japan is likely to pressure the Bank of Japan (BoJ) to raise the country's benchmark interest rate, which tends to weaken the dollar and, indirectly, may favor the Brazilian real.

• Therefore, new developments on this issue may continue to impact the currency market over the week ahead.

 

Next interest rate decision: Naoki Tamura, member of the BoJ Board, signaled that the Board may raise interest rates until inflation approaches the center of the target range of 2.00% p.a.

• With a weak yen intensifying inflationary pressure, 80% of investors are betting on another interest rate hike before the April meeting.

INDICATORS