- Rand strengthened as worries over political turmoil eased – Confidence bolstered by confirmation that Finance Minister not under arrest
- ‘Brexit’ worries diminished to improve Pound demand – Institute of Fiscal Studies warned of possible economic impact of vote to leave
- UK GDP revision unlikely to prompt Sterling volatility – Forecasts suggest no change to previous growth figures
- South African PPI predicted to dent GBP/ZAR exchange rate – Lower producer prices could improve Rand outlook
South African Rand (ZAR) Recovered Ground after Rumoured Arrest of Finance Minister Debunked
Market-spooking speculation that South African Finance Minister Pravin Gordhan could be facing arrest was, at least temporarily, quashed at the start of the week. A statement from the police indicated that there were no such plans, prompting the South African Rand (ZAR) to recover some of its recent losses. Political uncertainty is likely to remain a predominant influence on the risk-sensitive currency for some time to come, however, as markets remain concerned with the country’s economic outlook.
Risk appetite was generally muted following the latest commentary from members of the Federal Open Market Committee (FOMC), who continued to adopt a decidedly hawkish tone. Both the San Francisco and St Louis Federal Reserve Presidents indicated a belief that interest rates could be raised two or three times before the end of the year. As a result the US Dollar (USD) strengthened, in spite of scepticism that a hike is likely in June, and the Rand consequently slumped against rivals.
Tuesday saw the Pound (GBP) on particularly bullish form, meanwhile, thanks to an opinion poll suggesting that the ‘Remain’ campaign had significantly strengthened its lead over ‘Leave’. Investors were generally encouraged as the odds of a ‘Brexit’ seemed reduced, leading to a surge in support for Sterling.
This more optimistic attitude overshadowed a disappointing UK public sector borrowing report, which showed that the UK had overshot its target for the 2015-2016 fiscal year by 4 billion Pounds. While the outlook of the domestic economy remains in question, as doubts rise over how much referendum uncertainty is in fact to blame for the recent slowdown, this was not enough to prevent the Pound Sterling to South African Rand (GBP/ZAR) exchange rate from trending higher to a three-day best of 23.0502.
IFS ‘Brexit’ Warning Prompted Strong Pound Sterling (GBP) Uptrend
While fresh UK ecostats were limited on Wednesday this was not enough to prevent the Pound from extending its recent gains. Although the outcome of the EU membership referendum remains far from clear investors continued to pile into Sterling, rather than engaging in any particular profit taking. Optimism remained heightened after the Institute for Fiscal Studies (IFS) published a report into the potential impact of a ‘Brexit’, suggesting that the UK could face two more years of austerity measures in the event of a vote to leave. Consequently the GBP/ZAR exchange rate reaffirmed its uptrend.
However, as Lee Hardman, currency analyst at MUFG, noted this recent strength is likely to minimise any relief bounce in the wake of a ‘Remain’ victory, commenting:
‘For the pound to remain on stronger footing following a vote to remain, it will require building evidence that the UK economy has regained a firmer footing after slowing more materially early this year.’
Demand for higher-risk currencies such as the Rand remained generally muted, meanwhile, as US data bettered expectations. The March House Price Index climbed from 0.4% to 0.7% on the month, suggesting greater strength within the world’s largest economy and encouraging the chances of an imminent Fed rate hike. With gold at a fresh seven-week low there was little reason for investors to favour the softened Rand.
GBP/ZAR Exchange Rate Forecast: Rand Predicted to Weaken with Higher PPI
The only South African data release of the week will be Thursday’s Producer Price Index report, which will offer some new insight into inflationary pressure within the domestic economy. Should prices continue to strengthen at a fast pace then investors are likely to move away from the Rand, due to higher price pressures boding ill for the country’s economic health and monetary policy.
If US data continues to point towards the odds of the Fed hiking interest rates again sooner rather than later this could equally weigh on the Rand. A stronger US Dollar would put downside pressure on commodity prices, while tighter Fed policy would cause additional problems for the South African Reserve Bank (SARB).
Thursday’s UK GDP data is likely to be of limited impact for the Pound, with investors not anticipating any change in domestic growth from the first estimate. However, this reminder of the slowdown pressures facing the domestic economy could put an end to the bullishness of the GBP/ZAR exchange rate.
Current GBP, ZAR Exchange Rates
At the time of writing, the Pound Sterling to South African Rand (GBP/ZAR) exchange rate was making strong gains around 23.1170, while the South African Rand to Pound Sterling (ZAR/GBP) pairing was slumped in the region of 0.1789.
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