- Imminent appointment of new UK Prime Minister prompted Pound rally – Markets reassured by diminished sense of uncertainty
- South African Manufacturing Production bettered forecast – Rand narrowed Pound’s gains after output strengthened
- Bullish SA Retail Sales boost Rand demand – Signs of robustness in domestic economy emerged
- Bank of England expected to cut interest rates tomorrow – GBP ZAR exchange rate predicted to weaken with looser monetary policy
Confidence in the Pound weakened somewhat on Wednesday, with the GBP ZAR struggling to maintain its bullish form thanks to mounting Brexit-based anxiety.
Stronger South African Production Struggled to Dent GBP ZAR Exchange Rate for Long
Market relief that the Conservative leadership contest had ended prematurely continued to buoy the Pound (GBP) on Tuesday. Investors remained reassured by the prospect of greater clarity over the future of the UK’s relationship with the EU, even though Prime Minister elect Theresa May had previously noted an intention not to invoke Article 50 before the end of the year. This ongoing relief rally helped to overshadow any negative reaction to the latest comments from Bank of England (BoE) Governor Mark Carney, who maintained a generally cautious view of the domestic economy.
Some of the gains of the Pound to South African Rand (GBP ZAR) exchange rate were muted, however, thanks to the latest South African Manufacturing Production figures. Markets had anticipated a fresh dip in domestic output, given the persistent uncertainty and anxiety weighing on the local economy. Nevertheless, production was found to have risen bullishly on both the month and the year in May, offering some cause for confidence in South Africa’s economic outlook.
Risk appetite began to wane somewhat towards the close of Tuesday’s European session, though, with commodity prices coming back under pressure. Although the odds of the Federal Reserve opting to raise interest rates in the near future remained limited this prompted the Rand (ZAR) to weaken once again, allowing the GBP ZAR exchange rate to extend its gains further.
Weakening UK Business Confidence Weighed on Pound (GBP) Demand
The bullishness of the Pound eased on Wednesday morning, however, as the initial optimism over the speedier-than-expected appointment of a new Prime Minister began to wane. Uncertainty still dominates the outlook of the UK economy in spite of this, with markets continuing to digest the wider implications of the vote for Brexit. Optimism was further dented by a Credit Suisse survey of corporate sentiment which showed a sharp decline in confidence. With spending and hiring both looking to be negatively hit by the referendum result, this naturally put renewed downside pressure on the Pound.
Confidence in the Rand, on the other hand, improved in the wake of better-than-expected South African Retail Sales figures. Forecasts had suggested a modest weakening in consumer demand, prompting a surge in optimism once sales were instead revealed to have jumped by a bullish 4.5% on the year. With April’s results also revised higher investors were inclined to look more favourably on the higher-risk currency, as at least some of the concern over the domestic economy eased.
GBP ZAR Exchange Rate Forecast: BoE Rate Cut to Prompt Pound Downtrend
Thursday’s BoE policy meeting is expected to weigh on the appeal of Sterling, with the GBP ZAR exchange rate likely to slump further in response. Markets anticipate that policymakers will vote to lower interest rates to a fresh record low at the first post-Brexit meeting, a prospect that could see the Pound falling to new multi-year lows against rivals. As analysts at Danske Bank noted:
‘We expect the BoE to make a precautionary 25bp cut from 0.50% to 0.25% and at the same time communicate that more easing could come. BoE governor Mark Carney was very dovish in his recent speech, stating that ‘some monetary policy easing will likely be required over the summer’ due to a deterioration of the economic outlook. We interpreted this as a preannouncement of monetary policy easing as the speech was announced so suddenly and so soon before the July meeting.’
Demand for the Rand could also weaken ahead of the weekend, as expectations for the latest Gold and Mining Production figures are not particularly positive. Forecasts point towards a continued contraction in output, although May’s manufacturing result could encourage the chances of an upside surprise. If new signs of economic slowdown do materialise then the Rand is likely to trend lower against rivals, particularly if risk appetite does not particularly pick up in the coming days.
Current GBP, ZAR Exchange Rates
At the time of writing, the Pound to South African Rand (GBP ZAR) exchange rate was slumped in the region of 18.9970, while the South African Rand to Pound (ZAR GBP) pairing was trending around 0.0526.
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