While market participants awaited the release of America’s inflation data and the U.S. Federal Reserve’s interest rate decision later in the day, the naira saw some gains versus the dollar as the dollar index calmed slightly.
Price action indicates that naira bulls have been successful in maintaining the value of the naira around the N1500/$ border as worries in the nation’s FX market were allayed by an increase in the CBN’s FX reserves.
According to FMDQ statistics, the BDC rate increased by 0.14% on Tuesday from N1,477/$ to N1,475/$, while the local currency gained 0.02% from N1,481.32/$ to N1,481.03/$ in the official market.
Despite Nigeria’s poor oil output, the CBN’s report indicates that the country’s foreign reserves balance was $32.7 billion due to a recent increase from outside sources.
As part of the $3.3 billion crude oil-backed prepayment loan agreement with the Nigerian National Petroleum Company (NNPC) Limited, which resulted in the rise in Nigeria’s reserves, the FG got $925 million from the African Export-Import Bank (Afreximbank).
Because of higher-than-expected inflation, the U.S. Federal Reserve may decide to defer its planned interest rate reductions until later in the year. This might make it harder for foreign capital to enter Nigeria and cause the value of the naira to decline.
Because U.S. government bond yields are almost at an all-time high, foreign investors are playing it safe and are less interested in Nigeria’s capital market. Normally, these investors would be less ready to take a chance on developing market bonds.
The dollar index, which measures how much the US dollar is worth in relation to a few other major currencies, fell by a little over 28 basis points overnight, closing below the 105 index point mark following its peak of 105.46 index points on May 14.
US inflation figures
U.S. inflation data is of great interest to currency traders, and Wednesday is one of the most important days of the year for economic news due to the Federal Reserve’s anticipated reaction.
The probability of sticky inflation and strong growth has helped the U.S. currency appreciate and decreased the chance that the central bank will drop interest rates soon, as indicated by Friday’s better-than-expected jobs statistics.
Two fronts will be launched in this attack: the important consumer price index reading for May will be released this afternoon (Nigeria time), followed by the Fed’s policy meeting, which will provide critical indicators about the state of the economy and if policymakers may soon take their foot off the brake.
The CPI figure, coupled with last Friday’s surprisingly high nonfarm payrolls number and other recent data releases, is expected to cause economists to revise their forecasts for inflation and economic growth.
According to market projections, the price index for a broad range of goods and services will grow by 0.1% from April to May, but will still climb by 3.4% annually overall. This indicates that the index will hardly vary from month to month in May
Prices for food and energy are not included in the so-called core CPI, which is predicted to rise by 3.5% annually and 0.3% monthly.
None of those data significantly differs from the April readings, indicating that inflation is still much above the Federal Reserve’s target rate of 2%.
But a deeper look at a few important metrics, such insurance costs and essential services that don’t include housing, would show that inflation is, at the very least, rising steadily.
Prospects for the Fed Meeting
The consensus among market observers is that the Fed will shift the important “dot plot” upward. The grid is therefore anticipated to recommend fewer interest rate reductions than the three that were first predicted for 2024 in March.
While most economists predict two drops, there is significant worry that the estimate could fall to only one.
Economists also anticipate that the Fed will cut its expectation for GDP growth and hike its anticipated inflation from March’s estimates.
Two other notable Fed events include Chair Jerome Powell’s news conference and the statement made following the meeting.
