The local currency was unchanged against the greenback on Thursday as the haven currency firmed sharply, despite an interest rate cut by the U.S. central bank, which was offset by less dovish signals regarding future rate hikes.
The naira closed flat against the dollar in the parallel section of the forex market, trading at N1,660/$1. It also closed flat against the British pound, trading at N2,220/£1.
Fundamentals show that the Nigerian naira faces headwinds despite recent interest cuts by the U.S. Fed. The CBN’s recent intervention in the country’s fragile market has done little to counteract the naira’s declining value, with the country’s oil production—a major source of foreign exchange—still at tepid levels.
Price action indicates that naira short sellers are firmly in control of the N1,600 support line in the unofficial black market and will likely face more selling pressure due to rising demand for foreign exchange, primarily for vacations, fuel imports, and foreign tuition.
The dollar index and dollar index futures both increased by roughly 40 basis points during Thursday’s trading session while maintaining overnight gains.
The Fed lowered its benchmark rate by 50 basis points to a range of 4.75% to 5.00%, aligning with the higher end of market expectations, which coincided with the dollar’s strengthening.
Fed Chairman Jerome Powell stated that there is now a balance between the risks of rising inflation and further weakening in the labor market, and that the central bank would likely cut rates further, given increased confidence that inflation is falling. “The labor market is strong, and we intend to maintain it with such policy,” the Fed chief added.
As a result, the state’s rate range was reduced from 4.75% to 5.00%. The Fed’s decision caused market turmoil and signaled a shift in its monetary policy.
Donald Trump and his allies argue that it was a political choice. For Kamala Harris, who is running against an incumbent, the rate cut’s timing—less than two months before the election—is viewed by some pundits as advantageous.
The Fed’s decision marked a shift in its monetary policy and caused market turmoil, leading to a decline in the value of the U.S. dollar.
Technical analysis of the DXY index suggests a negative outlook, with indicators remaining in a bearish zone. Additionally, the decline in the 20-day Simple Moving Average (SMA) indicates a decrease in the pace of buying.
The Relative Strength Index (RSI) is declining and remains below 50, indicating a negative trend. The Moving Average Convergence Divergence (MACD) is printing lower green bars, further reinforcing the bearish trend.
However, the Fed chief stated that the American apex bank has no plans to return to the ultra-low-rate regime seen during the pandemic and that the Fed’s neutral rate will now be much higher than in the past.
While traders are still pricing in cuts of at least 125 basis points by the end of 2024, Powell’s comments raised concerns about higher-than-expected rates in the near and long term.
The U.S. dollar could continue to fall as the Federal Reserve looks set to implement further interest rate cuts. This anticipation arises as the Fed’s stance shifts, suggesting it is prepared to take more aggressive action if economic conditions warrant.
Chairman Jerome Powell asserted, however, that the significant decline indicated the end of the battle against inflation and that the largest economy in the world remains robust, despite worries that it might be entering a recession. “Our patient approach over the past year has paid dividends,” stated Mr. Powell. “We are much closer to our target for inflation, and we are more confident that it will rise steadily to 2 percent.”
Chairman Jerome Powell asserted, however, that the significant decline indicated the end of the battle against inflation and that the largest economy in the world remains robust, despite worries that it might be entering a recession. “Our patient approach over the past year has paid dividends,” stated Mr. Powell. “We are much closer to our target for inflation, and we are more confident that it will rise steadily to 2 percent.”