- Bearish Factors
- The expectation of a “radical fiscal change” in Germany boosts the country's growth prospects and favors the euro’s performance, indirectly weakening the dollar.
- Bullish Factors
- Interest rate decisions and new FOMC projections should reinforce the view that the Federal Reserve will be cautious in its cycle of rate cuts, favoring the profitability of dollar-denominated bonds and contributing to the global strengthening of the currency.
- The Copom interest rate decision may indicate a slower pace of increases for the basic interest rate (Selic), harming the attraction of foreign investments and weakening the real.
- The presentation of the Income Tax exemption proposal and the possibility of voting on the 2025 Budget may result in higher risk premium demands by investors, contributing to a weakening of the real.
The week in review
The week was marked by volatility in global financial markets amid concerns about American economic growth and fears that the import tariffs imposed by the U.S. could hinder the country’s dynamism.
The exchange rate of the real ended this Friday’s (14) session quoted at 5.7451, a weekly decline of 0.8%, monthly decline of 2.9%, and annual decline of 7.0%. Meanwhile, the dollar index closed this Friday’s session at 103.7 points, a variation of -0.1% for the week, -3.6% for the month, and -4.1% for the year.
USDBRL and Dollar Index (points)
Source: StoneX cmdtyView. Preparation: StoneX.
KEY EVENT: FOMC Interest Rate Decision
Expected Impact on USDBRL: Bullish
There is near consensus that the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) should keep its basic interest rate unchanged in the range between 4.25% and 4.50% per annum. The Committee is expected to emphasize a cautious and patient stance in its statement, in line with recent comments by Fed Chair Jerome Powell, arguing that the institution should not rush to cut rates while uncertainty and volatility about economic conditions persist. In this regard, the FOMC is expected to argue that it needs more time to assess the evolution of American macroeconomic variables such as employment, inflation, and productive activity, as well as to obtain greater clarity about the potential impacts of measures proposed by the federal government, such as the imposition of tariff barriers or mass layoffs of public employees.
The balance of risks faced by the Federal Reserve appears more adverse than that observed in January, meaning that both the risks of more persistent inflation and the risks of a slowdown in the labor market seem to have increased. This, in turn, raises the importance of the Summary Economic Projections, which will accompany this week’s FOMC decision and provide the Committee’s estimates for growth, unemployment, inflation, and interest rates between 2025 and 2027, particularly the “dot plot” for the interest rate, which shows how FOMC members anticipate the evolution of this rate. Although most bets in the futures market expect three rate cuts in 2025, it is likely that the dot plot will reduce its median from two cuts to just one this year. Thus, the FOMC decision may decrease investors’ bets on a decline in U.S. interest rates, which tends to strengthen the dollar globally.
USA: History and Outlook for the Interest Rate – updated on March 14, 2025
Source: CME FedWatch Tool. Preparation: StoneX. Refers to the most probable bet in the interest rate futures market on the indicated date.
Copom Interest Rate Decision
Expected Impact on USDBRL: Bullish
There is a strong consensus that the Monetary Policy Committee (Copom) of the Central Bank of Brazil (BC) is expected to raise the basic interest rate (Selic) for the fifth consecutive time, from 13.25% per annum to 14.25%. However, there are doubts as to whether the Committee will include future guidance in its statement. Although recent indicators have shown a worsening of the Brazilian inflation scenario—which maintains pessimism regarding inflation expectations and tends to pressure Copom to adopt a tighter cycle of Selic hikes—they have also pointed to an economic slowdown, which could encourage Copom to be more cautious in conducting monetary policy. The median projection from the Focus Bulletin anticipates two more increases after this week’s decision, 0.50 percentage points in May and 0.25 percentage points in June. The possibility of a slowdown in the pace of Selic hikes in the coming months, in turn, may harm the profitability prospects of bonds denominated in reais and hinder the attraction of foreign capital, weakening the real.
Fiscal Concerns in Brazil
Expected Impact on USDBRL: Bullish
The President of the Republic, Luiz Inácio Lula da Silva, stated that he will announce on Tuesday (18) the project to expand the Income Tax exemption for individuals with monthly incomes of up to BRL 5,000. It is worth noting that, in November 2024, when the government’s economic team unexpectedly released the project for the first time, the initiative had a negative impact among investors, deepening the perception that the Administration showed little urgency and low political willingness to promote structural adjustments in public spending. At that time, in a context of a strong credibility crisis in fiscal policy management, such an announcement significantly increased the volatility of domestic assets and exerted unfavorable pressure on both the exchange rate of the real and the yield curve of future interest rates (DI). Although Lula has repeatedly emphasized his economic team’s commitment to sound public accounts and stressed that the project seeks alternative revenues to offset its losses, there is concern among investors that these intentions may not materialize. In this regard, it is worth highlighting that the rapporteur of the 2025 Annual Budget Bill (LOA), Senator Angelo Coronel (PSD-BA), stated that the Mixed Budget Committee intends to vote on the project on Wednesday (19) and then bring it to the Plenary. Thus, the presentation of the Income Tax exemption project and the possibility of a vote on the 2025 Budget may result in a higher perception of fiscal risks for Brazilian assets, which tends to weaken the real.
Fiscal Expansion in Germany
Expected Impact on USDBRL: Bearish
This week, Germany’s future Chancellor, Friedrich Merz, reached an agreement with the Green Party to approve in the German Legislature a “radical change” in the country’s fiscal rules, enabling the issuance of €500 billion in public debt to invest in infrastructure and expand the German armed forces. The bloc led by the conservative CDU, which was the biggest winner in the parliamentary elections of February and is represented by Merz, together with the center-left SPD, the biggest loser in the elections and represented by the current German Chancellor, Olaf Scholz, and the Greens, holds more than two-thirds of the votes in the current configuration of both German parliamentary houses required for constitutional changes, although it does not reach this mark under the new Parliament, which will take office on March 25. Thus, it is expected that the fiscal package will be approved before that date, with a likely vote in the Bundestag on Tuesday (18) and in the Bundesrat on Friday (21), which should extend the recent trend of euro strengthening and, indirectly, contribute to a weakening of the American currency.
INDICATORS
Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA and StoneX cmdtyView.
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