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USDBRL: All eyes are turned to Jackson Hole

All eyes are turned to Jackson Hole, an annual symposium sponsored by the Federal Reserve Bank (Fed) that started last Friday. The symposium focuses on an important economic issue that faces US and world economies.

The Federal Reserve on Friday left the door open to a September interest rate hike even while several US central bank officials acknowledged that turmoil in financial markets, if prolonged, could delay the first policy tightening in nearly a decade. Although some top policymakers, said that the recent volatility in global markets could quickly ease and possibly pave the way for the US rate hike.

Brazil has slipped into recession, with the government reporting on Friday that the Gross Domestic Product (GDP) plunged 1.9% in the Q2 alone, deepening the gloom in the world’s 7 largest economy already battered by falling commodity prices, political crisis and a corruption scandal. Brazil is now in its biggest contraction for six years and with the 2015 slump forecast to extend in milder form through 2016, economists believe the country is headed for the longest recession since 1931.

Since the beginning of the year the USDBRL rallied more than 32.5% and is in a well-established bullish phase since late May. The currency rallied last week but could not sustain the upward momentum and gave some of its gains back to the market closing in the middle of the weekly range. The stochastic in showing an overbought market but even with the pair well into overbought territory, we should not fight the strong upward trend.

Expecting an upward move to a key level at 3.9626 on a break above previous week high at 3.6506 (scenario 1) or a break below previous week low at 3.4897 could trigger a sell-off to a weekly support at 3.3105 (scenario 2).