Will the Central Bank of Nigeria Cut Interest Rates in November?

By Lukman Otunuga, senior research analyst at FXTM,

Rising inflationary pressures in Nigeria will certainly complicate the Central Bank of Nigeria’s efforts to cut interest rates to stimulate growth.

The nation’s annual inflation edged up to 11.24% in September 2019, its highest level in three months after falling to a three-and-a-half-year low of 11.02% in August.  Given how the CBN governor has already made it clear that inflation must hit single digits before a rate cut could be considered, it remains uncertain whether the central bank will cut interest rates before year end.

A rate cut could inject the Nigerian economy with a welcome boost, as it stimulates consumption which accounts for roughly 80% of GDP. But However, cutting the MPR when the inflation rate is at 11.22 percent risks further overheating prices. Like other economies, Nigeria may be exposed to the impacts of a global slowdown but its economy is very different from the US’ which is currently experiencing anemic price inflation. This may be why the Central Bank of Nigeria decided to prioritize reducing inflation to single digits and said it is in no hurry to reduce its key rate.

In the absence of cutting interest rates, the CBN has raised the country’s loan to deposit ratio for banks to 65% from 60%. Making sure money is in circulation instead of being tied up in government bonds sounds like a logical way to keep the economy on the road to recovery. However, it remains to be seen whether this will be enough to promote growth.

Trade hopes lift risk mood; Brexit drama continues

There is a mood of optimism and hope across financial markets on Tuesday morning thanks to upbeat comments from President Donald Trump regarding the progress of trade talks with China.

Given how the President said China has signaled that negotiations over the initial trade deal are moving in the right direction, expectations remain elevated over both sides signing an agreement at a meeting in Chile next week. This positive sentiment is supporting Asian stocks during early trading and is likely to trickle down to European markets later this morning. While the encouraging mood across financial markets will remain stimulated by trade optimism, risk aversion could still make an abrupt return should talks drag on or turn sour.

Pound volatility expected as Brexit drama continues

The past few days have been volatile for the British Pound due to ongoing uncertainty and constant drama revolving around Brexit.

Sterling seems to be catching its breath early this morning as MP’s prepare to vote on Boris Johnson’s Withdrawal Agreement Bill later this afternoon. If the deal hits a brick wall, the ball then gets hurled back to Brussels as we await confirmation of the Government’s Brexit extension request. Should MPs back the Prime Ministers deal, a programme of motion will take place shortly after, followed by a debate on amendments of the bill on Wednesday. Regardless of what happens today, the British Pound is set to remain volatile.

 With regards to the technical picture, GBPUSD has broken above the bearish channel on the weekly timeframe. A solid daily close above 1.30 should inspire a move towards 1.3160 in the medium term. Should 1.30 prove to be a stubborn resistance level, I see Sterling declining back towards the 1.2700 support.

Dollar Index poised for further declines?

There has not been much action in the Dollar Index (DXY) since the start of the week with prices trading around 97.76 as of writing.

The heavy selloff witnessed last week has placed bears in a position of power. The DXY is under pressure on the daily charts with prices trading under the 200 Simple Moving Average. Sustained weakness below the 97.50 level should encourage a decline back towards 97.00 in the short to medium term.

Commodity spotlight – Gold

Gold is likely to remain on standby in the absence of a fresh directional catalyst.

The precious metal is waiting for the next big theme or market-moving event that will influence global sentiment and risk appetite. Until something fresh is brought into the picture, Gold is positioned to trade within a modest range in the short to medium term.

Looking at the technicals, all eyes will remain on the psychological $1500 level. Sustained weakness below this point should inspire a decline towards $1470. Alternatively, a solid breakout above $1500 will most likely open the doors towards $1515 and $1525, respectively.