Why Naira is struggling with a strong British Pound

The Naira/British Pound exchange rate hovered above N1,000/£ for about a week due to strong parallel market demand.

The naira’s fall against the British pound has coincided with a fall in the dollar, which has fallen to N800/$ for some major black-market operators.

The rapid devaluation of the Nigerian currency followed the reunification of the Naira exchange rate system by the Central Bank of Nigeria to liberalize the foreign exchange market.

High demand for the sterling by Nigerian Students

Demand is high, according to data from the UK Higher Education Statistics Agency. Highlighted that 128,770 Nigerian students were admitted to UK universities between 2015 and 2022

In addition, research related to CBN foreign currency outflows to the UK increased to US$2.5 billion in 2022. According to SBM Intelligence analysis, Nigerian students living in the UK and their dependents contribute around £1.9bn a year to the UK economy.

The pound rallied to more than a year high against both the dollar and the euro on Wednesday after strong UK jobs data confirmed market hopes for another rate hike by the Bank of England (BoE).

A Hawkish Bank of England

Cable climbed to a 15-month high of 1.2934 after strong UK jobs data made the Bank of England (BoE) likely to need another rate hike.

The British pound is the best-performing major currency against the dollar, and traders expect the BoE to hike rates more than other central banks as Britain’s inflation proves to be more stubborn than inflation elsewhere rising by 6.6% in 2023.

Current market prices suggest another roughly 140 basis points rate hike by the BOE, much larger than either the Fed or the European Central Bank. Rising interest rates are usually a short-term boost for the currency, but many analysts say the accompanying slowdown in economic growth will weigh on the pound in the long run.

Data on Tuesday showed a key indicator of UK wages rose to a record high despite an unexpected rise in the unemployment rate.

Historically, the British Pound (GBP) has been stronger than most currencies, including the United States. dollar. In 2007, the value of the pound reached an all-time high, doubling the value of the US dollar. As of 2023, the British Pound is her 5th strongest currency in the world, holding a steady value above 1.20.

Reflecting both historical practice and the Bank of England’s willingness to step in to protect the pound in times of crisis, the sterling pound has enjoyed a nominal premium over the US dollar (USD) for many years. Currently, the pound appears to be stable, with an exchange rate of £1 = US$1.3 on 12 July 2023.

Stronger economic fundamentals in the UK

The Quid rose on signs that the country’s economy is doing better than expected. This resilience has bolstered hopes that the Bank of England will continue its aggressive rate hikes despite concerns about the health of the global banking sector. Rising interest rates can strengthen the home currency as it helps attract foreign investors looking for higher yields.

Analysts said GDP, manufacturing, and employment data beat many expectations, lower natural gas prices and a broader economic slowdown in the country, and continued recovery in the pound after gaining this year.

“We are absolutely constructive right now,” Goldman Sachs said in a research note, expecting the pound to appreciate against other currencies such as the euro.

Basically, experts believe that the same variables that hurt the pound in 2022 have changed to their favour, especially natural gas prices and the Bank of England’s relative position on monetary policy, he said.

Many traders who bet on the pound earlier this year have closed their bets in recent weeks, amid expectations of a deep recession, which also contributed to the pound’s rally.

By the end of the year, NatWest projects that the pound will reach $1.30. Robson of NatWest stated, “`We think the impact on credit will be greater in the US than in the UK,’ adding that the fact that the UK economy is more dependent on services than manufacturing compared to other countries is an understatement. It should be positive for the pound, he added.