September 2025’s edition of Forex in Five focuses on the shifting tides in global macroeconomic policy, particularly the US Federal Reserve's recent actions, and provides a closer look at currency movements in key African markets.
The Fed takes centre stage in developed markets
The narrative in developed markets has pivoted back to core macroeconomic policy, with the US Federal Reserve's actions taking precedence over political discussions and tariff disputes. The central question has been when the US would continue its easing cycle, a topic spurred by a series of inflation prints, including the US Consumer Price Index (CPI) andthe US Producer Price Index (PPI), that have consistently come in softer than anticipated. This has effectively sidelined the controversy around political interference in the Fed's policy, giving a clear green light for a rate cut.
The Fed followed through on this expectation, cutting rates by 25 basis points this week—a move that was largely priced in by the market. However, the real focus was on the future trajectory of monetary policy, as revealed by the Fed's "dot plot," where each member projects where they see rates heading. The dot plot showed a lack of a clear consensus, which, while perhaps disappointing to a market that craves a firm, predictable path, is a deliberate tactic by the Fed. By keeping their options open and avoiding a rigid pre-forecasted trajectory, they maintain flexibility and avoid being boxed into a corner, especially with a keen eye now on employment data.
The rate cut and the subsequent narrative of further easing have dealt a blow to the US dollar. The dollar has seen significant weakness, particularly against the Euro, with the EUR/USD exchange rate climbing to recent highs around the 1.18 to 1.19 range. This weakness could persist for the rest of the year, especially since the European Central Bank (ECB) and the Bank of England both decided to hold their rates steady, creating a clear divergence in policy.
A mixed bag of stability and intervention in emerging markets
Prolonged stability in the Nigeria is short-lived
There is a period of prolonged stability in the Nigerian market, with the official exchange rate hovering around the ₦1540 level, saw a welcome drop towards ₦1500. This was a positive sign, suggesting a natural increase in dollar supply and a decrease in the need for the Central Bank of Nigeria (CBN) to intervene and use up its foreign reserves.
However, this stability was short-lived. A combination of factors, including new circulars on the taxation of interest payments on government paper, spooked the market. The rate jumped back up from ₦1500, prompting a swift, and somewhat disappointing, intervention from the Centrfal Bank of Nigeria (CBN) to bring it back down. While the intervention was successful in controlling the rate, it signals a return to old habits, moving away from the "willing buyer, willing seller" market the CBN has been aiming for. While the parallel market still shows a slight premium (around 1%) to the official rate, it's a far cry from the 3-4% blowout seen last year, suggesting that this spread should be the norm for the foreseeable future.
Kenyan shilling remains stable
The Kenyan shilling continues its remarkable period of stability. The exchange rate remains within a very tight band of 129 to 130 against the US dollar, with an even narrower half-shilling range being observed recently. While there's always a tail risk of a downside move to 140 or 150, it appears less likely to materialize before the end of the year. The currency's stability is largely dependent on a potential new IMF program and sustained foreign investment, both of which seem to be holding up well for the time being.
Volatility in other markets
We've seen some volatility in other markets, such as the one influenced by Senegal. Rates there have stabilized around the 2500 level, in line with where banks are trading. The volatility was a result of a push and pull between a "bullish" trend driving rates down and a shortage of dollar liquidity pushing them back up. This stability is expected to hold until the end of the year when local corporates begin rebalancing their books.
Meanwhile, in the wider West African monetary zone, inflation is coming under control, much like in Nigeria. There's no fundamental reason for a significant depreciation of the currency, and it should remain within a 1-2% range from its peg, with the ZAR staying within a 5% range.
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