The US dollar is set to print a major breakout candle against the Brazilian real today. The major driver of the bullish move is a perceived change for the Fed’s pivot point.

The change of heart on just how quick interest rates in the US will start coming down is reflected in the US bond market. 10-year and 2-year notes are up for a sixth day in a row. Two-year Notes are trading at 4.75%, up 21.2bp from last Monday when the market closed at 4.538%.

Recent economic data and comments from Fed officials seem to have pushed expectations for a date of the Fed’s pivot point further into the year. The bond markets have had a more bearish reaction with bond prices dropping consecutively over 6 sessions.

The FOMC will meet this week and the Fed chair Powell will give a press conference on Wednesday at 2:30pm NYT. Market expectations are clear, no change in interest rates. However, we can expect a sharp increase in volatility as the markets digest each of Powell’s comments.

The obvious question, which will be reformulated over an over, is when does the Fed believe interest rates can start coming down. The immediate direction of USD/BRL will depend a lot on the type of answer we get.

To add to an exciting week, the same day as the FOMC meeting we have the BCB interest rate decision at 5:00pm NYT. The market consensus here is that the Brazilian central bank will lower rates by 50bp, from 11.25% to 10.75%.

Technical View

In the day chart below for USD/BRL we can see that today’s candle is about to break out of the upward sloping triangle (yellow area). Confirmation of the bullish breakout will come with a close above the resistance level (blue line) with tomorrow’s candle.

The next resistance level I find on the day chart at the 5.50 area (orange line), was set by a previous high on May 31, 2023. This level has particular significance as it then led to a drop of 12.5%.

To the downside, the USD/BRL finds support from the Ichimoku cloud between 4.94 and 4.915. If that were broken I see the support level at 4.81, which was the most recent low from December 26, 2023.

For the next direction a lot depends on Powell’s comments on Wednesday. However, once the dust settles I believe this pair has further bullish momentum. I base my opinion on the accuracy of the bullish triangle breakout, and the widening interest rate differential for this pair.