Colombian Peso Under Pressure at the Start of the Last Quarter of 2024

Geopolitical Tensions and Oil Prices

The rise in oil prices is directly linked to recent conflicts in the Middle East, particularly the tensions between Iran and Israel. U.S. intelligence reports suggest that Iran may be preparing a ballistic missile attack on Israel, which has created a climate of uncertainty and increased demand for safe-haven assets. This geopolitical context has put pressure on risk assets, including Latin American currencies, affecting the Colombian peso despite its positive correlation with oil prices.

Monetary Policy of the Banco de la República

On the other hand, the monetary policy of the Banco de la República has recently been in the spotlight, with the institution making a decision regarding its interest rate yesterday. In its most recent meeting, the Board of Directors decided to reduce the intervention rate by 50 basis points, bringing it to 10.25%. This marks the fifth consecutive cut of this magnitude, with four of the seven board members supporting the decision, while the other three favored a more aggressive reduction of 75 basis points.

This monetary policy seeks to balance inflation risks with the need to stimulate economic activity. In August, Colombia's annual inflation stood at 6.1%, below market expectations, while core inflation, excluding food and regulated services, fell to 5.5%. These figures reflect a decrease in food costs and some regulated services, which have helped to moderate inflationary pressures.

Impact on the Colombian Economy

Despite the interest rate cut, the Banco de la República continues to adopt a cautious stance due to persistent inflationary risks. Although inflation expectations for 2025 have decreased in some markets, analysts remain steady, reflecting a fragile balance between economic recovery and inflationary pressures.

Regarding economic growth, Colombia's GDP grew at a rate of 1.8% year-on-year in the second quarter of 2024, driven by stronger-than-expected domestic demand, particularly in private consumption. However, fixed capital investment has yet to return to pre-pandemic levels, posing structural challenges to the country's economic recovery.

Outlook for the Colombian Peso

The external environment has also been unfavorable for the Colombian peso. Despite the expectation of further interest rate cuts by the U.S. Federal Reserve, risk premiums in Latin America have risen significantly, as noted by the Colombian institution yesterday. In Colombia's case, this increase has been exacerbated by the drop in oil prices in previous weeks and the country's challenging fiscal conditions.

In the short term, the Colombian peso is likely to continue facing pressure due to a combination of global factors, such as geopolitical tensions in the Middle East, and local factors, including monetary policy and fiscal conditions. Although the Banco de la República's rate cut could support economic recovery, the Colombian currency will remain vulnerable to movements in international commodity markets and the evolution of inflation expectations.

Technical Analysis USD/COP

Monthly Chart Colombian Peso

The monthly chart of USD/COP shows that during the first half of 2024, the Colombian peso continued its relative decline after reaching record highs near 5,000 pesos per dollar. Currently, the price is consolidating around key Fibonacci levels. Specifically, the pair faces significant resistance around the 23.60% Fibonacci level (4,325 COP), which represents a critical area for traders. The inability to break through this area decisively could suggest a continuation of the correction process, with a potential retracement towards the 38.20% support (3,834 COP). A break below this level could open the door to a deeper correction.

On the other hand, the former upward trendline, drawn from 2014, has become a significant resistance, limiting the pair's advance. This level will be crucial in defining the future direction: a return above this line could reactivate a long-term upward trend, while failure to overcome it would leave the pair vulnerable to further retracements.