Heightened ‘Brexit’ fears saw the volatile Pound Sterling to South African Rand (GBP/ZAR) exchange rate fall to a six-week low during the past seven days.
Pound Sterling Crashes on Growing Odds of UK Vote for ‘Brexit’
Pound Sterling tumbled toward the end of last week on the latest ‘Brexit’ referendum developments. Growing trader confidence that the UK would vote to ‘Remain’ a part of the European Union was dashed by the latest developments, with strong UK data on Wednesday failing to stem the Pound’s decline.
Concern over a ‘Brexit’ was so strong that even dire data from South Africa failed to lift GBP/ZAR out of negative territory. South Africa’s first quarter GDP figures showed a significant decline on the quarter, dropping from a previous downwardly-revised 0.4% to -1.2%, while the year-on-year growth rate declined -0.2% from 0.5%, which had also been revised lower.
Mixed South African production figures for April on Thursday were again offset by continued Pound Sterling weakness. Monthly mining production saw a strong increase after the previous month’s losses, while the decline in year-on-year production slowed dramatically from -17.8% to -6.9%. The fall in gold production also slowed markedly, while manufacturing production re-entered growth territory.
Friday saw the most damaging single development, when the latest poll gave the ‘Leave’ campaign a 10% lead over the ‘Remain’ camp. The survey, conducted by ORB, found that 55% of voters intended to vote to leave the European Union, an increase of 4% since the last survey was carried out, while support for staying part of the EU had dropped -4% to 45%. The poll was released after the close of trade, however, so it wasn’t until yesterday that traders and Sterling reacted.
By the close of the week the GBP/ZAR exchange rate had recovered from a six-week low of 21.7499 to a weekly high of 21.7847.
GBP/ZAR Advances as Widening South African Current Account Trumps ‘Brexit’ Fears
Although in negative territory against the majority of its peers, Pound Sterling has trended bullishly against the South African Rand today thanks to the latest data release.
The Pound’s position is weak overall, with two new referendum polls giving the pro-‘Brexit’ referendum campaign a solid lead over the pro-EU camp. The Sun newspaper has also come out in support of a ‘Brexit’. The ‘Leave’ campaign have been clarifying some of their post-‘Brexit’ promises, suggesting that £100 million per week of the money saved on EU membership could be given to the NHS, while £1.7 billion would go on cutting VAT.
The ‘Remain’ camp will be breathing a sigh of relief that things aren’t worse, however, after a legal challenge to the UK’s attempts to block child benefits for EU migrants was overturned. The European Court of Justice (ECJ) ruled in favour of the move secured by David Cameron during his membership reform negotiations in a challenge brought by the European Commission.
Domestic data was poor, however, with both core and non-core inflation growing at a steady pace rather than accelerating as forecast.
Despite these negative headwinds, GBP/ZAR is trending bullishly after a surprise widening of the South African current account deficit to 5% of GDP, -0.9% worse than Bloomberg economists had forecast. The decline was driven by a rise in dividend payments during the first quarter from local companies to shareholders overseas.
According to the South African Reserve Bank (SARB); ‘The risk-averseness among international investors was raised by the lacklustre domestic economic growth and political uncertainty.’
As a result, GBP/ZAR is currently making gains of over 1%.
Pound Sterling to South African Rand (GBP/ZAR) Exchange Rate Forecast: ‘Brexit’ Referendum to Dominate Sentiment
Considering the high level of volatility already seen with nine days to go until the vote, it’s highly likely that the remainder of this week (as well as next) will see referendum fears in control of GBP/ZAR movement.
The impact of incoming data is therefore likely to be muted. UK labour market data, including the claimant count rate, is due out tomorrow, with retail sales and a Bank of England (BoE) interest rate decision set for Thursday. No change to monetary policy is predicted from the meeting.
The week’s South African data includes tomorrow’s April retail sales figures, which are expected to show a strong rise.