BRL Outlook: Hawkish BCB to offset depreciation, but political risks may tip the balance

In Q4, the Brazilian real traded in its narrowest quarterly range against the US dollar since the onset of the pandemic, however, this had more to do with bullish and bearish drivers balancing out price action rather than a lack of events: Brazil’s central bank hiked interest rates by a total of 300bps, while the Fed acknowledged inflation may be more persistent than previously anticipated. At the same time, Omicron briefly hampered risk sentiment while the volatile political backdrop in Brazil remained throughout the quarter. Looking ahead to the next quarter, BRL drivers are likely to remain centred around the inflation outlook and the BCB’s responses to the ever-growing price pressures, along with developments in the US monetary space and fixed income markets. As the year progresses, the Brazilian general elections that are set to be held in October will become increasingly relevant for FX markets given the real’s reputation of weakening in times of political uncertainty and upcoming elections.

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Author: Ima Sammani, FX Market Analyst

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