Forex in 5: What's driving currencies this week?

The last few weeks have seen a notable shift in the global economic landscape, moving away from the intense focus on geopolitical tensions and allowing more idiosyncratic market drivers to take centre stage. Let's dive into the key movements and what's on the horizon for major currencies and emerging markets.

Crude prices calm and markets breathe easier

Remember the jitters around escalating global conflicts? Those seem to have largely subsided, at least as reflected in the price of crude oil. After a period of elevated prices, we've seen a significant drop back down to the $67 a barrel mark. This signals a clear message from the markets: the worst-case scenarios are largely being priced out, and a more stable environment is anticipated. This broader calm has opened the door for other economic narratives to gain prominence.

The dollar dilemma

In the US, recent non-farm payrolls came in more positively than expected, giving the dollar a slight boost against other G10 currencies. However, this appreciation might be fleeting. The Federal Reserve is under increasing pressure to cut rates, with whispers of two, possibly even three, cuts before the end of the year, likely back-loaded into Q4. This sentiment, coupled with potential further cuts in early 2026, is putting downward pressure on the dollar.

Is Euro the new safe haven?

Amidst the dollar's struggles, the Euro appears to be emerging as a relative safe haven. We're seeing strong levels, with EURUSD hovering around 1.17-1.18. This strength is partly driven by fears of further US tariffs in the coming months, prompting some investors to reduce their dollar exposure. While calls for EUR/USD to hit 1.20 by year-end have quietened slightly, the Euro's resilience is a key trend to watch.

A political rollercoaster for the British Pound

The Great British Pound has had a bumpy ride recently. Rumours of government instability and pressure on the Finance Minister initially hit the currency. However, recent changed sentiment from Prime Minister Keir Starmer and support for Rachel Reeves seem to have provided some stability, leading to a partial recovery. Typical politics, perhaps, but certainly impactful on the Pound's short-term trajectory.

Stability amidst shifting tides in emerging markets

Despite the drop in global oil prices, emerging markets, particularly those in Africa, have shown remarkable stability.

Nigeria remains steady amid political reform

While the oil price spike was more about "risk-off" sentiment than genuine appreciation, Nigeria's official exchange rate (FEM) has remained steady around 1520-1530 to the dollar. The recent tax bill introduced by President Tinubu, aimed at taxing the wealthy to benefit the common person, is a clear move to regain political capital after the impact of fuel subsidy removals and currency devaluation. The ambitious target of an 18% tax-to-GDP ratio by 2030 remains, and a potential rate cut from the CBM could be on the cards sooner rather than later.

Kenya holds steady in run up to IMF review

Inflation remains within the Central Bank of Kenya (CBK) target, although recent prints were slightly higher. GDP growth has softened due to a dip in tourism. The Kenyan Shilling is holding firm within the 129-130 range, with no immediate signs of a break. The recent completion of the IMF's latest review will be crucial to watch, as any new program could influence the currency's medium to long-term outlook. Stable FX reserves are currently aiding the CBK in defending this range.

Bank of Tanzania cuts rates

In a surprising move, the Bank of Tanzania just cut rates by 25 basis points, after holding them at 6% for over a year. While the Tanzanian Shilling has seen some appreciation and subsequent whipsaw, it remains around 2600. The rationale behind this cut is yet to be fully revealed, and we await comments from the Bank of Tanzania.

West African CFA (XOF) & Central African CFA (XAF) experience depreciation

Both currencies have experienced some depreciation, particularly XOF, which had been remarkably stable against its peg. The significant debt burden of Senegal, with its debt-to-GDP ratio now well over 100%, is putting pressure on the XOF, raising concerns about default risk. The drop in Senegalese Eurobonds paints a challenging picture. However, if Euro weakness persists, we might see a recovery in XOF, with XAF potentially following suit.