- Bearish Factors
- Copom minutes and the Monetary Policy Report should reinforce the Central Bank’s firm tone and favor attracting foreign investment to the country, contributing to a strengthening of the real.
- Bullish Factors
- Expanded and prolonged uncertainty regarding Middle East geopolitical tensions, U.S. tariff policy and U.S. fiscal balance may increase global risk aversion and stimulate demand for “safe-haven” assets, which tends to weaken the real.
- Uncertainty about the U.S. inflation outlook and resilience in the country’s economic activity data may reduce bets on rate cuts by the Federal Reserve this year, favoring the attraction of financial investments to the U.S. and contributing to a global strengthening of the dollar.
- Powell’s testimony before the U.S. Congress may reinforce the Federal Reserve’s cautious stance and reduce bets on rate cuts this year, favoring the attraction of financial investments to the U.S. and strengthening the dollar globally.
- Moderation of the IPCA-15 may improve inflation expectations for Brazil and suggest that Copom could have room for rate cuts earlier than anticipated, hampering the attraction of foreign investment and weakening the real.
The week in review
The week was marked by monetary policy decisions by the central banks of Brazil and the U.S., both of which adopted a more cautious stance and signaled that their rates will remain stable in the short term. Additionally, increased geopolitical tensions amid the conflict between Israel and Iran boosted demand for assets considered “safe-havens.”
The USDBRL closed this Friday (20th) at BRL 5.5265, a weekly decline of 0.3%, a monthly decline of 3.4%, and an annual decline of 10.5%. Meanwhile, the Dollar Index (DXY) finished the week at 98.8 points, a change of +0.7% for the week, −0.6% for the month, and −8.6% year-to-date.
USDBRL and Dollar Index (points)
Source: StoneX cmdtyView. Prepared by StoneX.
KEY EVENT: Expanded and Prolonged Uncertainty
Expected impact on USDBRL: bullish
Approximate penetration depth of bunker-buster bombs in reinforced concrete (meters)
Source: The Royal United Services Institute for Defence and Security Studies. Prepared by StoneX.
In recent weeks, except for oil prices, financial markets in general—and currency markets in particular—have exhibited lower volatility and more subdued fluctuations even with the outbreak of a new conflict in the Middle East. Although this stability is likely to continue throughout this week, it is important to highlight that there are no apparent fundamentals to justify it and that significant risk factors remain, with the potential for a rapid reversal of the business environment.
First, press reports speculate about the possibility of direct U.S. involvement in attacks carried out in Iran, and President Donald Trump himself said he is likely to make a decision “within the next two weeks.” Such involvement would be important for the Israeli objective of undermining Iran’s nuclear program, as only the U.S. possesses the GBU-57 weapon capable of reaching the underground enrichment complex at Fordow at an estimated depth of approximately 90 meters. With no indication that the conflict could end in the short term, the risks of damage to the region’s oil infrastructure and blockades of strategic logistical routes remain high and could increase investors’ perception of geopolitical risk.
Additionally, uncertainty related to U.S. tariff policy also has the potential to increase investors’ risk aversion. The temporary reduction of import tariffs for all countries except China ends on July 9, three weeks from now. Furthermore, on June 11, Donald Trump had already threatened to unilaterally raise import tariffs for most of America’s trading partners “in two to three weeks” (there are therefore two weeks left)—a threat he had made on May 16 that did not materialize.
Finally, the White House reiterated this week its intention to ratify a new budget law by July 4, two weeks from now. A proposal for this law has already been approved by the House of Representatives but continues to face strong resistance among Senate Republicans, who hold only three more votes than the Democrats. When the bill was debated in the House a few weeks ago, it increased perceptions of fiscal risk in the U.S., as most analyses concluded that the public deficit and debt levels would accelerate under its terms.
Although the trend in recent weeks has been a global weakening of the dollar amid a reduction in the weight of U.S. assets in investor portfolios—which benefited the real—it now seems more likely that the aforementioned risks will drive demand for assets considered “safe-havens” in times of stress and unpredictability, such as the Swiss franc, the Japanese yen, the euro, and the U.S. dollar, thereby undermining the real’s performance.
Copom Minutes and Monetary Policy Report
Expected impact on USDBRL: bearish
In Brazil, attention is drawn to the release of the minutes from last Wednesday’s (18th) meeting of the Monetary Policy Committee (Copom) of the Central Bank (BC), where the Committee unanimously decided to raise the benchmark interest rate (Selic) from 14.75% p.a. to 15.00% p.a. while simultaneously signaling a “pause” in the rate-hiking cycle. This last increase was not fully anticipated by investors, and the Committee made an effort to communicate that rates are expected to remain stable “for a considerably prolonged period” while Copom assesses whether “the cumulative impacts of the adjustment already made, yet to be observed, […] are sufficient to ensure inflation convergence to the target.”
Additionally, the Central Bank will publish the second-quarter Monetary Policy Report, the institution’s most comprehensive document analyzing the national and external macroeconomic environment with projections for the main indicators for the coming years. The publication is followed by a press conference with the institution’s president, Gabriel Galípolo, and Economic Policy Director, Diogo Guillen.
Both the tone of the Copom minutes and the comments of the Central Bank leaders are expected to appear more resolute regarding the authority’s commitment to price stabilization, which should consolidate the outlook of a wide interest-rate differential for Brazil compared to other economies and contribute to attracting foreign investment, strengthening the real.
Economic Data in the U.S.
Expected impact on USDBRL: bullish
Despite the “tariff shock” imposed by the White House on April 2 raising investors’ concerns about higher inflationary pressures and a sharper slowdown in the U.S. economy, the indicators released since then have not shown clear immediate impacts in response to the change in U.S. trade policy. Furthermore, in the monetary policy decision last Wednesday (18th), Federal Reserve Chair Jerome Powell reinforced a cautious approach, indicating that the current moment calls for prudence and that it will be necessary to await new signals on economic activity and price levels before adjusting the country’s benchmark interest rate. Powell also stated that, although the degree of uncertainty about the current outlook remains significant, it has been gradually decreasing. In this scenario, economic data to be released this week will be closely watched by market participants, especially for clues that could foreshadow the Fed’s next moves.
On the inflation front, the main highlight of the week will be the release of the Personal Consumption Expenditures Price Index (PCE) for May, the indicator used by the Federal Reserve to monitor inflation. Median estimates point to a slight acceleration in its core, which excludes the most volatile items such as food and energy. Additionally, the annualized average inflation rate is also expected to remain above the Fed’s 3.0% target. Regarding activity data, investors will be particularly attentive to the final reading of U.S. real GDP for the first quarter of 2025, as well as consumer confidence indices released by the University of Michigan and the Conference Board for June. These confidence indicators are important because they capture the public’s perception of current conditions and future expectations for the economy, making them good barometers of activity. Despite significant declines in both indicators in March and April, the May readings exceeded analysts’ projections, raising expectations for this week’s releases. Thus, given the uncertain outlook for activity and still-elevated inflation, it is likely that the view that rate cuts may take longer than expected will be reinforced throughout the week, which tends to strengthen the dollar against other currencies and weaken the real.
Powell’s Testimony to Congress
Expected impact on USDBRL: bullish
Investors will also watch the semiannual testimony of Federal Reserve Chair Jerome Powell before the U.S. Congress. Parts of the hearing are expected to include criticism from lawmakers, particularly allies of President Donald Trump, who are likely to express dissatisfaction with the current interest-rate levels. Since the beginning of the Republican president’s term, political pressure for rate cuts has intensified, and Trump has repeatedly stated his support for lower rates to spur economic growth. In this context, Powell is expected to maintain the cautious stance that has characterized his recent communications. He is likely to emphasize the importance of the Fed’s institutional independence, reiterating that monetary policy decisions will continue to be guided by concrete data on economic activity and price trends. In other words, Powell will stress that any adjustments to interest rates will depend on the evolution of the indicators, not on external or political pressures. In this sense, the testimony should reinforce the expectation of maintaining U.S. rates, which supports U.S. Treasury yields and strengthens the dollar globally.
Economic Data in Brazil
Expected impact on USDBRL: bullish
This week will also see the release of indicators that could test the outlook for the Central Bank’s monetary policy. On one hand, labor market data for May are expected to remain strong despite the aggressive rate-hiking cycle by the Central Bank. On the other hand, the June Broad National Consumer Price Index 15 (IPCA-15) is expected to remain moderate and contribute to improved inflation expectations. It is likely that the moderation in inflation will have a greater influence than labor market resilience, and thus investors may increase their bets that Copom could cut rates earlier than anticipated, undermining the outlook for a wide interest-rate differential for Brazil and weakening the real.
INDICATORS
Sources: Central Bank of Brazil; B3; IBGE; Fipe; FGV; MDIC; IPEA; and StoneX cmdtyView.
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