Societe Generale analysts highlight that Brazil’s 1Q Gross Domestic Product (GDP) rebounded to 1.1% qoq, supported by fiscal stimulus and mining, but at the cost of higher inflation and a worsening deficit. With inflation expectations deteriorating and the Banco Central do Brasil (BCB) warning on its 3% target, the bank notes USD/BRL is consolidating below 5.05, with the next resistance hurdle at 5.08 and an upside bias.

Consolidation below 5.05 with upside bias

"In Latam, 1Q GDP growth in Brazil rebounded to 1.1% qoq from an upwardly revised 0.3% in 4Q, supported by government stimulus and strong mining activity."

"Fiscal stimulus to insulate the economy from the war and boost consumption ahead of the October election lifted growth but are adding worsening the trade off with inflation and the public deficit. Headline inflation accelerated to 4.64% in early May and inflation expectations are deteriorating."

"BCB monetary policy director Nilton David sounded the alarm on rising inflation expectations and said that the BCB has an obligation to deliver on the 3% target. Will the BCB opt to pause in June after two straight cuts? "

"USD/BRL for now is consolidating below 5.05 (50dma) but bias for the pair remains for upside with next hurdle eyed at 5.08."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)