The British pound sterling is outperforming most of the world’s currencies this year, including the naira, despite a hawkish CBN.
The CBN stated that FPIs bought almost four-fifths of a 1.053 trillion-naira auction of three-month to 12-month bills a few weeks ago, lured by sharply higher yields, which it said was a sign that its policy actions to attract dollar inflows were working.
However, the naira still trades at N2,078 to the pound’s lower bound at the unofficial market, not far from the lowest levels of N2,414 against the British pound.
Britain’s economy appears to be more resilient than anticipated.
Traders expect the Bank of England to start easing in August; the Fed and ECB are expected to cut in June. The CBN might have to turn to foreign borrowing, according to the Economist Intelligence Unit, to maintain the value of the naira and meet its foreign exchange commitments.
- “Our view is that foreign borrowing is necessary to rebuild the CBN’s buffers, fully clear a backlog of unfulfilled foreign exchange orders, and restore confidence,” the statement read. Likely, this will only be possible by the end of 2024.
While confidence in the naira remains fragile, the British economy appears to be recovering, and inflation is declining.
The data mix is improving, which supports GBP, and UK rates are expected to stay higher for longer. As a result, the pound has benefited from this, with GBP/NGN reaching a multi-month high this month.
Last week, the pound reached its highest level in seven months and had its best week since November versus the dollar. Data in the upcoming days may contribute to consolidating those gains and supporting the thesis that the UK economy is recovering.
The British economy is expected to grow in January after a slight contraction in December, according to monthly gross domestic product data. Industrial production is expected to advance by 0.7 percent annually in January, which is a little faster than in December.
The UK escaped the severe recession that many had projected for 2023, but the economy remained stagnant as a result of aggressive interest rate hikes that raised the benchmark rate to 5.25 percent.
The cost of food, energy, and mortgage payments all skyrocketed, placing severe strain on consumers, and business confidence fell to levels not seen since the global financial crisis.
However, Bank of England Governor Andrew Bailey noted last month that there had been “encouraging signs” on the major employment and service price indicators while emphasizing that policymakers are still seeking proof that the current trend can continue.
Furthermore, there are many reasons to exercise caution. Concerns about the government announcing large giveaways before elections later this year have been expressed by some investors, particularly in light of the Conservatives’ significant lead over opposition Labour in the polls.
After the administration of Liz Truss attempted to spur growth with unfunded tax cuts in 2022, markets went into meltdown.”
