Naira at 7th week low with U.S inflation data insight

On Monday, the dollar stabilized against other major currencies, while the naira remained close to its lowest point since March 20th. Traders are closely watching for a crucial inflation report to gauge whether there will be any interest rate cuts in the U.S. this year.

The naira touched a seven-week low over the weekend, trading at N1,466/$1 at the official window and N1,459/1$ at the parallel market.

The CBN is presently under pressure to hike interest rates to accelerate stability in Nigeria’s foreign exchange (FX) market amid weak oil output and recent payment of FX liabilities. Market fundamentals indicate that it is unlikely that the naira will hit the February low, at least not this month, as traders await the outcome of the CBN’s MPC meeting.

The CBN intensified efforts this year to stabilize the naira’s exchange rate volatility, which caused the naira to appreciate steadily against the dollar from roughly N1,912 per dollar in late February to below N1000/$ in April and has now plunged back to N1450/$ levels.

U.S dollar index shows stability

The US Dollar Index (DXY) posted modest gains in the first trading session of the week within the 105.35 index point bandwidth while traders waited for the Federal Reserve.

Market expectations for rate cuts this year have strengthened following the rather dovish Federal Reserve policy statement earlier this month and a weaker-than-expected April U.S. payroll report.

The Federal Open Market Committee’s (FOMC) decision to cut rates in September will be heavily influenced by this week’s CPI. Fed Chair Jerome Powell will speak at the Foreign Bankers’ Association gathering in Amsterdam on Tuesday.

According to CME’s FedWatch Tool, markets have priced in a 61.2% possibility of rate reductions of some kind starting with the Fed’s September meeting, with a total of roughly 50 basis points of cuts anticipated. But last week’s speakers couldn’t agree on whether interest rates were high enough, which prompted a variety of statements from Fed representatives.

US inflation data for April

This week’s inflation data, which comes in the shape of the Producer Price Index (PPI) on Tuesday and the Consumer Price Index (CPI) on Wednesday, will provide the market a chance. This is concerning for emerging markets because they require lower US interest rates to attract foreign portfolio investors.

The US Labor Department data showed prices increased by 3.5% in March compared to a 3.2% increase in February, as seen from data retrieved for the US Consumer Price Index report. Prices increased by 0.4% MoM in March, surpassing the forecast of 0.3%.

U.S dollar outlook

The US economy is still fragile, and markets are anticipating slower inflation, which gives the Fed the green light to begin reducing. Officials from the United States Central Bank are nonetheless cautious in the interim.

Though the Simple Moving Averages and other market indicators provide a mixed signal for the greenback, this is because the bearish interference caused the DXY to drop below the 20-day SMA, but it still stayed above the 100-day and 200-day SMAs.

This situation suggests that bulls are still in charge of the medium- to long-term trend, even though bears have been effective in determining the short-term trajectory.