As UK wage growth accelerated by more-than-expected in the three months to January, the GBP/ZAR exchange rate entered a fresh uptrend last Wednesday. The report encouraged hopes that the Bank of England (BoE) might well be prompted to take a more hawkish view on monetary policy in the near future as weaker earnings has been a particular sticking point in the past. Consequently the Pound strengthened against rivals early Wednesday morning.
Sentiment turned a little more volatile in response to Chancellor of the Exchequer George Osborne’s latest UK budget, with markets unimpressed by Osborne’s chances of hitting his much-vaunted surplus by the end of the current parliament. Concerns were raised about the Chancellor’s forecast savings, with some economists suggesting that the proposed cuts and tax changes would not be enough to balance the books.
However, the South African Rand was weakened by a disappointing Retail Sales figure, which showed a decline from 4.1% to 3.1% on the year in January. As another reminder of the weaker state of the South African economy, this decline in consumer confidence prompted traders to move away from the Rand. As a result the GBP/ZAR exchange rate climbed to a monthly high of 22.8388.
Rand Boosted by Surprise SARB Rate Hike
The GBP/ZAR currency pair failed to hold onto its gains after the Federal Open Market Committee (FOMC) took a decidedly more dovish tone on monetary policy than markets had anticipated. With the Fed forecasting just two interest rate hikes over the course of 2016, rather than the four previously predicted, the appeal of higher-risk assets like the Rand improved.
While the Bank of England was keen to stress confidence in the underlying fundamentals of the UK economy, the Monetary Policy Committee (MPC) continued to vote unanimously in favour of leaving interest rates on hold on Thursday. As doubts continued to mount over the viability of Osborne’s budget, meanwhile, the Pound entered a slump across the board.
Traders were taken by surprise on Thursday afternoon when the South African Reserve Bank (SARB) unexpectedly announced that it was hiking interest rates from 6.75% to 7.00%. The central bank’s latest attempt to curb rising inflationary pressure bolstered the Rand. Markets were also relatively encouraged by suggestions that President Jacob Zuma could be facing a fresh challenge as new allegations of corruption surfaced.
UK Inflation Rate Falls Short of Forecast
After Work and Pensions Minister Iain Duncan Smith resigned in response to planned cuts to disability benefits the Pound fell further out of favour. Although the UK government performed a sharp U-turn on the proposal and pledged to make no further cuts to the welfare budget, the ensuing political turmoil has dampened the mood towards Sterling.
Tuesday morning saw no end to the Pound’s recent downtrend, as the latest UK inflation and public sector net borrowing figures both proved disappointing. With domestic inflation holding steady at a weak 0.3% there seems little incentive for the BoE to hike rates in the near future. Meanwhile, Osborne looks set to exceed his borrowing target for the 2015-2016 financial year, as government borrowing rose further than expected.
The Rand could weaken substantially on Wednesday, however, if South African inflation is found to have strengthened on the year in February. Although the SARB rate hike will not have had a chance to impact this latest figure, any signs of rising inflationary pressure are likely to give the GBP/ZAR exchange rate a boost.
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Summary of major upcoming data releases that we think may move the market.