The naira posted some gains against the greenback as the dollar index moderated significantly while market players awaited America’s inflation data and the U.S. Federal Reserve’s interest rate decision due later in the day.
Price action shows that naira bulls have been able to keep the naira within the N1500/$ borderline as an uptick in the CBN’s FX reserves moderated concerns in the country’s FX market.
FMDQ data indicates that the local currency gained 0.02% from N1,481.32/$ on Tuesday to N1,481.03/$ at the official market, while the BDC rate rose 0.14% from N1,477/$ to N1,475/$ on Tuesday.
CBN’s data shows that Nigeria’s foreign reserves balance stood at $32.7 billion amid a recent boost from external sources despite Nigeria’s tepid oil output.
The FG received $925 million from the African Export-Import Bank (Afreximbank) as part of the $3.3 billion crude oil-backed prepayment loan deal with the Nigerian National Petroleum Company (NNPC) Limited, which caused the increase in Nigeria’s reserves.
The U.S. Federal Reserve might decide to postpone its scheduled interest rate decreases until later in the year due to higher-than-expected inflation. This could hinder foreign investment inflows into Nigeria and depreciate the naira’s value.
The yields on U.S. government bonds are near an all-time high, causing global investors, who would normally be less willing to take a chance on developing market bonds, to play it safe and show less interest in Nigeria’s capital market.
The dollar index, which compares the value of the US dollar to a few other major currencies, was down a little more than 28 basis points, trading below the 105 index point threshold overnight after hitting its highest level since May 14 at 105.46 index points.
U.S inflation Readings
Currency traders are keen on U.S. inflation readings, and the Federal Reserve’s intended response on Wednesday is one of the most significant days of the year for economic news.
As suggested by Friday’s better-than-expected jobs data, the possibility of sticky inflation and robust growth has helped the U.S. dollar strengthen and lessened the likelihood that the central bank will lower interest rates soon.
Crucial indications regarding the economy and whether policymakers may soon take their foot off the brake will be issued in a two-pronged attack that begins this afternoon (Nigeria time) with the crucial consumer price index reading for May and concludes with the Fed’s policy meeting.
Economists anticipate that the CPI report, together with the unexpectedly high nonfarm payrolls number from last Friday and other recent data releases, will prompt Fed members to adjust their projections for inflation and economic growth.
Markets project that the price index for a wide range of products and services will barely change from month to month in May, rising by 0.1% from April to May but still representing a 3.4% annual increase overall.
The so-called core CPI, which does not include food and energy prices, is expected to increase at 3.5% annually and 0.3% monthly.
All those figures indicate that inflation is still substantially above the Federal Reserve’s goal rate of 2%, and none deviates much from the readings from April.
However, a closer examination of several key indicators, such as insurance premiums and core services that do not include housing, would demonstrate that inflation is, at the very least, gradually increasing.
Fed Meeting outlook
The market commentary broadly agrees that the Fed will move the crucial “dot plot” in an upward direction. As a result, the grid is expected to suggest fewer interest rate reductions than the three projected for 2024 in March.
Most economists anticipate two reductions, but there is considerable concern that the prognosis may drop to just one.
Additionally, economists expect the Fed to raise its projected inflation from March’s predictions and lower its outlook for growth in the gross domestic product.
The post-meeting statement and Chair Jerome Powell’s news conference are two more noteworthy Fed events.