Naira Gains Against Dollar As Market Awaits US Inflation Data

The naira made some gains against the US dollar as the dollar index moderated. Market players are awaiting the release of America’s inflation data and the Federal Reserve’s interest rate decision later today.

According to price action data, naira bulls have managed to keep the naira within the N1500/$ range. An uptick in the Central Bank of Nigeria’s (CBN) foreign exchange reserves has eased concerns in the country’s forex market.

FMDQ data shows that the naira appreciated by 0.02% from N1,481.32/$ on Tuesday to N1,481.03/$ at the official market. Meanwhile, the Bureau De Change (BDC) rate rose by 0.14% from N1,477/$ to N1,475/$ on the same day.

Boost in Foreign Reserves

CBN data indicates that Nigeria’s foreign reserves now stand at $32.7 billion. This increase is partly due to the $925 million received from the African Export-Import Bank (Afreximbank) as part of a $3.3 billion crude oil-backed prepayment loan deal with the Nigerian National Petroleum Company (NNPC) Limited.

US Inflation and Federal Reserve’s Decision

The US Federal Reserve’s decision on interest rates is highly anticipated. Due to higher-than-expected inflation, the Fed might delay its planned interest rate cuts until later in the year. This decision could impact foreign investment inflows into Nigeria, potentially affecting the naira’s value.

“Investors are closely watching the US inflation data,” said James Otis, a currency trader in Lagos. “The Fed’s decision will significantly influence market dynamics.”

Global Market Dynamics

Yields on US government bonds are near an all-time high, causing global investors to be cautious about investing in developing markets, including Nigeria. This caution is linked to the higher yields offered by US bonds, which appear safer to investors.

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The dollar index, which measures the US dollar’s strength against other major currencies, dropped by over 28 basis points. It traded below the 105 index point threshold overnight, after reaching its highest level since May 14 at 105.46 index points.

Implications for the Naira

Currency traders are keenly awaiting US inflation readings and the Federal Reserve’s response. Friday’s better-than-expected jobs data suggests robust growth and persistent inflation, which has bolstered the US dollar and reduced the likelihood of imminent interest rate cuts.

Key economic indicators, including the consumer price index (CPI) for May, will be released this afternoon (Nigeria time), followed by the Fed’s policy meeting. These events will provide critical insights into the economic outlook and potential policy adjustments.

“Today is one of the most significant days of the year for economic news,” said Lola Adeyemi, an economist in Abuja. “The Fed’s actions will be closely scrutinized by global markets.”

Expectations from the Fed

Economists expect the CPI report and recent data releases to influence the Fed’s projections for inflation and economic growth. Markets predict a slight month-to-month increase in the price index, with a 0.1% rise from April to May, and an annual increase of 3.4%. The core CPI, excluding food and energy prices, is anticipated to rise by 3.5% annually and 0.3% monthly.

These figures suggest that inflation remains well above the Fed’s 2% target. The Fed is likely to adjust its interest rate forecasts and inflation projections accordingly.

The market broadly agrees that the Fed will revise its “dot plot” upwards, indicating fewer interest rate cuts than previously projected. Most economists expect two rate cuts this year, though some speculate there may be only one.

The naira’s recent gains reflect cautious optimism among traders, tempered by the potential impact of US economic policy decisions. As global investors await the Fed’s announcements, the naira’s performance remains closely linked to international market dynamics.

Jerome Powell’s post-meeting press conference and the Fed’s statement will be pivotal in shaping market expectations and investment flows into Nigeria.