BRL likely to trend higher ahead of the U.S. Federal Reserve policy meeting, says Commerzbank

The Brazilian Real is expected to trend higher ahead of the United States Federal Reserve monetary policy meeting scheduled to be held on December 14.

The Brazilian central bank (BCB) is likely to hike interest rates on Wednesday, post the decision of the Federal Reserve Open market Committee (FOMC) and if it also sounds more hawkish, this may well put pressure on the BRL and make life difficult for the Brazilian central bank.

Once again the inflation data in Brazil was able to surprise positively. At 7 percent in November, following 7.9 percent the previous month, the fall was slightly more pronounced than expected. The central bank is likely to be pleased about this as it would like to speed up the rate cut cycle due to the recession.

Further, if inflation continues to fall as quickly towards its target range (2.5-6.5 percent) as was the case so far it may soon be able to do so. The developments on the inflation front help the central bank with its monetary policy course.

From its point of view fiscal consolidation is another important prerogative for expansionary monetary policy. The second vote in parliament on budget consolidation is due tomorrow. If this is successful the consolidation can start. As the dismissal of the President of the Senate Renan Calheiros was prevented last week it seems likely that the consolidation process can proceed. So far so good, but then there is the Fed, Commerzbank reported.