FX.co ★ Brazilian Real Rebounds After Mid-Month Inflation and USD Weakness

The Brazilian real strengthened to approximately 5.54 against the US dollar, bouncing back from the lows observed in early August. This movement comes as investors digested lower-than-anticipated domestic inflation figures and a softening US dollar. Brazil's mid-month inflation rate was recorded at 4.41% in December, aligning closely with predictions of 4.4% and remaining within the Central Bank's target range of 1.5%–4.5%. This has helped quell immediate concerns about rising prices, supported the narrative of disinflation, and reduced the inflation risk premium factored into the currency. Concurrently, the US dollar weakened, despite a robust 4.3% GDP growth in the third quarter, as market expectations lean towards Federal Reserve easing next year and a decline in the demand for the dollar as a safe haven. However, the real's gains are limited by persistent political uncertainty. Concerns persist regarding electoral risks linked to Bolsonaro and recent legislative actions, such as a Senate bill aimed at reducing Jair Bolsonaro’s sentence, which create uncertainty about policy consistency and fiscal management, thus maintaining a high foreign exchange risk premium for Brazil.