South African Budget Prompted Sharp Slump in Rand Demand
The appeal of the Pound (GBP) diminished further on Wednesday in response to a report from the Resolution Foundation, which suggested that the government is facing a £84 billion budget black hole over the next five years. This did not offer much encouragement to investors, seeming to limit Chancellor of the Exchequer Philip Hammond’s options in the Autumn Statement.
However, the Pound to South African Rand (GBP ZAR) exchange rate was prompted to rally sharply as markets responded to the South African medium-term budget statement. Investors were not encouraged by Finance Minister Pravin Gordhan’s performance, which saw the domestic growth forecast revised down from 0.8% to 0.5%. With risk aversion also on the rise the Rand (ZAR) slumped markedly, failing to benefit from the softness of the US Dollar (USD).
GBP ZAR Exchange Rate Forecast: BoE and SARB Rate Decisions in Focus
Downside pressure for the Pound is likely on the back of the third quarter UK GDP report, which is expected to point towards a marked slowing in domestic momentum. Should growth be found to have weakened further than forecast then worries over the outlook of the economy could be heightened. A softer showing here would seem to raise the risk of the Bank of England (BoE) opting for additional monetary loosening before the end of the year, a prospect that would set the GBP ZAR exchange rate on a fresh downtrend.
However, as Lee Hardman, currency analyst at MUFG, noted:
‘BoE Governor Carney spoke yesterday on the Pound stating that there are limits to the bank’s willingness to overshoot the inflation target, and officials were not indifferent to the exchange rate. The Pound’s moves in recent week were described as substantial. On balance, we believe that his comments suggest that the BoE will refrain from lowering rates further at next week’s policy meeting although it is unlikely to offer much support for the Pound.’
On the other hand, the South African Reserve Bank (SARB) could be prompted to raise interest rates in November thanks to persistently high inflation. Price pressures are unlikely to abate in the near term, with the economic outlook of South Africa remaining generally bearish. This could see the Rand trending lower against rivals, with any fresh disappointment from domestic data expected to encourage further Rand selling.
The GBP ZAR exchange rate could benefit from any SARB action, especially as the appeal of higher-yielding assets is expected to weaken ahead of the Federal Reserve’s December policy meeting.
Current Interbank Exchange Rates
At the time of writing, the Pound to South African Rand (GBP ZAR) exchange rate was trending bullishly at 17.00, while the South African Rand to Pound (ZAR GBP) pairing was slumped in the region of 0.05.
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