More about the communication and less about the decision

CAUSE: The caution dominating global markets continues to be fueled by a set of overlapping and mutually reinforcing uncertainties. Geopolitical tensions in the Middle East, which have led to the disruption of traffic through the Strait of Hormuz, are putting pressure on commodity prices and directly and indirectly affecting global inflation, adding significant volatility to assets. It is in this environment that investor attention turns to the so-called Super Wednesday, when monetary policy decisions occur simultaneously in Brazil and the United States. The Fed is expected to keep interest rates unchanged (in the 3.5% to 3.75% range) in this decision, with the market pricing in a probability of over 85% for this hold. Here in Brazil, however, the market is divided between a new 0.25 percentage point cut or the possibility of accelerating to 0.50 percentage points for the Selic rate, currently at 14.75%, contingent on some reduction in oil prices and global uncertainty. In other words, the easing cycle has already begun—but the pace and magnitude of the next steps remain open.

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CONSEQUENCE: Given this murky environment, markets tend to adopt a defensive stance. The trajectory of oil prices, currency behavior, and the evolution of inflation expectations will be the barometers that determine whether the Copom is in a position to accelerate the pace of cuts or if it will need to remain cautious. In the U.S., the oil shock has pushed interest rate cut expectations to the end of 2026, with analysts signaling that the Fed should remain on hold at least until September. This flight to safety tends to strengthen the dollar globally. However, the real finds support in the still very high interest rate differential. The Copom has reinforced that it continues to monitor how domestic fiscal policy developments impact monetary policy and financial assets, maintaining a cautious stance in a scenario of greater uncertainty. Thus, tomorrow's decisions—and, especially, the tone of the communications from the Fed and the Copom—will be decisive in calibrating expectations regarding the interest rate differential, capital flows, and the exchange rate trajectory in the coming weeks.

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