USD/COP: What next for the peso as Colombia’s inflation eases?

The USD/COP exchange rate pulled back slightly on Friday after the latest Colombia consumer inflation data. It dropped to a low of 4,547 on Friday, lower than this week’s high of 4,723. In all, the Colombian peso has jumped by more than 7% against the US dollar this year.

Colombia inflation eases

Colombia, like other countries, is having a major challenge with inflation as prices of most items jump. Recently, however, the pace of inflation has eased slightly, helped by the strengthening peso. According to the statistics agency, Colombia’s headline consumer inflation dropped from 1.05% in March to 0.78% in April. This decline was bigger than the media estimate of 0.90%.

The CPI also declined from a year earlier. The headline consumer price index fell from 13.34% in March to 12.82%. This decline was also lower than the median estimate of 12.96%. Still, inflation remains at the highest level in more than 24 years.

The official CPI numbers came on the same day that the central bank decided to upgrade the outlook of inflation in the country. It now expects that inflation will average 9.5% this year, higher than the previous estimate of 8.7%. These numbers are higher than the bank’s target of 3%.

Bank of Colombia rate hikes

As a result, there is a likelihood that the central bank will continue hiking interest rates in the coming months. It has boosted rates from 1.75% during the pandemic to 12.75%, making it one of the most hawkish central banks in the emerging markets. Analysts expect that central bank will continue hiking this year.

The BoC rate hikes have coincided with those from the United States. As we wrote here, the Federal Reserve decided to hike interest rates by 0.25% this week, bringing rates to 5.25%. Analysts expect that the bank will leave interest rates at that level for several more months.

USD/COP forecast

The daily chart shows that the USD to COP exchange rate has moved downwards in the past few months. It has formed a bearish channel that is shown in blue. This price is a few points below the upper side of the descending channel.

The pair has moved below the 50-day moving average. Therefore, the USD/COP pair will likely remain in this range and then have a bullish breakout to the upper side of the channel at 4,800.