FX.co ★ Brazilian Real Strengthens on Hawkish Central Bank

The Brazilian real appreciated to 5.65 against the USD, maintaining its position near the eight-month high of 5.6 observed on May 13th. This strength reflects an optimistic outlook for improved trade relations with the United States and a proactive stance by Brazil's central bank. The CAGED survey revealed that job creation in Brazil surpassed expectations in April, while the PNAD data indicated a significantly lower-than-expected unemployment rate for the April quarter. This robust labor market data has afforded the central bank the flexibility to maintain its benchmark policy rate at a restrictive level for an extended duration. In its most recent meeting, the central bank implemented a 50 basis point increase, bringing the rate to 14.75%, the highest level since 2006. Additionally, a U.S. court recently overturned reciprocal tariffs imposed by President Trump last month, effectively eliminating 10% tariffs on Brazilian goods. Nevertheless, domestic market concerns linger after the Ministry of Finance temporarily increased the Tax on Financial Transactions (IOF) to 3.5%, sparking fears that policymakers are considering capital controls.