Strong UK Labour Market Data Fails to Keep GBP/ZAR Exchange Rate on the Rise ahead of FOMC Policy Announcements
Although the approach of this evening’s Federal Open Market Committee (FOMC) policy announcement continues to weigh on the South African Rand, the GBP/ZAR exchange rate has lost much of its earlier strength.
The Pound is now just 0.1% higher against the Rand than at the start of the day, with the earlier strong wage growth and low unemployment figures failing to provide a sustainable boost.
Strong UK Labour Market Data Tips GBP/ZAR Exchange Rate Back into Recovery ahead of FOMC Policy Announcements
Accelerating UK wage growth and falling unemployment has pushed the GBP/ZAR exchange rate 0.7% higher today, with appetite for the South African Rand kept muted by the approach of this evening’s US monetary policy decisions.
Average weekly earnings grew 2.8%, beating forecasts for 2.6% growth, helping to further lessen the squeeze on real wages caused by strong inflation – which data yesterday showed was falling.
Government borrowing was also marginally better than expected and the unemployment rate has fallen back to 4.3%, the lowest rate recorded since 1975.
Meanwhile, the South African Rand has also been weakened by yesterday’s inflation data, which showed that consumer price growth has fallen further below the midpoint of the South African Reserve Bank’s (SARB) target range.
With overall inflation falling from 4.4% to 4% during February, the central bank could have more reason to consider cutting interest rates, which would weaken the Rand.
GBP/ZAR Exchange Rate Gains as Focus on FOMC Meeting and Disappointing Mining Data Weigh on South African Rand
With market attention turning to this week’s US interest rate decision, appetite for high-risk currencies was dwindling and so the GBP/ZAR exchange rate was able to record solid and consistent gains in the latter half of last week.
This was despite a pessimistic response from some UK think tanks to Chancellor Philip Hammond’s Spring Statement and news that Unilever had picked the Netherlands over the UK as its official headquarters.
Sterling’s advance was helped by a weak South African Rand, even though Wednesday’s first-quarter South African business confidence index revealed a greater-than-anticipated surge in private sector sentiment, with a score of 45 easily beating the predicted rise from 34 to 38.
However, Thursday’s data was less supportive and this helped to keep the GBP/ZAR exchange rate on strong form.
Gold production fell -7.7% year-on-year during January, with December’s decline revised marginally higher from -12.4% to -12.5% - economists had expected a return to positive territory with growth of 0.5%.
Mining production also disappointed, with revisions to December’s figures showing a surprise -0.5% contraction year-on-year and a worse-than-expected month-on-month contraction of -3.8% compared to the initially-reported fall of -3.1%.
Below Forecast UK Inflation Data Undermines GBP/ZAR Exchange Rate Gains made on Surprise Publication of Draft Brexit Deal
The GBP/ZAR exchange rate shot higher at the start of this week after a draft of the Brexit treaty was jointly published by the UK and the EU, containing agreements on many aspects of the split that had been delaying progress in negotiations for months.
The dwindling likelihood of the UK crashing out of the European Union without any deal in place boosted the Pound to South African Rand exchange rate to its highest levels since 4 February.
These gains were quickly lost on Tuesday after UK inflation figures disappointed forecasts and fell further than expected, lessening the odds of an interest rate hike from the Bank of England during the May policy meeting.
Also helping to push the Pound lower on Tuesday was the expectation that South Africa will be able to avoid having its credit rating downgraded by Moody’s this week, thanks to the ousting of President Jacob Zuma.
The credit ratings agency had previously warned that it would slash its rating of South African government debt to ‘junk’, which would put it in line with Fitch and Standard & Poor’s, but a new budget following the appointment of Cyril Ramaphosa as the nation’s leader is expected to be sufficient to keep Moody’s at bay – for now.
GBP/ZAR Exchange Rate Forecast to Gain if Bank of England Signals May Rate Hike is Likely
The Bank of England will announce its latest monetary policy decisions tomorrow, which could see the GBP/ZAR exchange rate trending widely.
The Pound will gain a boost if BoE officials signal that May is indeed a likely time for an interest rate hike.
However, if the Monetary Policy Committee (MPC) seem more cautious on interest rates, then the GBP/ZAR exchange rate could tumble.
South Africa’s data calendar includes tomorrow’s January retail sales data, which is expected to show an uptick in activity, and the latest interest rate decision from SARB on Wednesday.
Economists are divided over whether the benchmark rate will be cut from 6.75%, but the recent inflation data suggests that further easing could be on the horizon, if it is not delivered during next week’s meeting.