Foreign Currency Market Update – GBP / ZAR Update
The middle part of last week saw the world’s premier central bank send out an unexpected message on the future direction of its monetary policy and the risk-driven Rand pushed ahead against Sterling as a consequence.
The Pound Sterling Rand exchange rate had been loitering at above the 18.3000 level on the morning of the US Federal Reserve announcement. Market participants had been expecting the Fed to hint that its first interest rate cut in a new policy-tightening cycle was close at hand, so there was no surprise that the Bank’s policysetters opted to drop the word ‘patient’ in describing their attitude towards an increase.
However, the fact that this adjective was replaced by the advice that ‘further improvement’ would be required in America’s jobs market before a rate hike could be countenanced suggested that such an action could still be a considerable way off. The prospect of continued ‘easy money’ for the world’s number one economy helped the export-led Rand to record strong gains against the Pound. GBP ZAR dropped back into the 17.0000s before the end of last week as a result.
The early part of this week brought further losses for the Pound against the Rand. Tuesday morning’s UK inflation data revealed that a basket of British goods cost exactly the same last month as it had done in February 2014. The stalling of domestic price rises makes the prospect of deflation for the UK economy all the more real and this, combined with last week’s comments from senior Bank of England officials suggesting that a UK interest rate cut remains a live possibility, sent the Pound lower across the board. The move which followed pushed GBP ZAR down to a fresh 6-week low of 17.4791.
Yesterday’s session saw Sterling recover a little against the Rand in spite of the South African Reserve Bank’s decision to maintain its key lending rate at 5.75% when some analysts had been touting a rate cut. The SARB’s accompany statement suggested that a tightening of policy might be necessary in the short to medium term in order to combat inflationary threats from increasing energy costs. If investors take these words onboard then GBP ZAR has the potential to drop through this week’s low and head downwards to January’s 17.0356. Conversely, a further recovery for the Pound could send the pair back up towards the 18.0000 threshold.
Heads Up
Summary of major upcoming data releases that we think may move the market.