Uncertainty and Brexit worries continued to weigh on the Pound last week, particularly as domestic data also proved generally discouraging. Both the June Construction and Services PMIs fell short of forecast, a bearish sign as the surveys were primarily compiled ahead of the EU referendum result. This offered little cause for confidence in the outlook of the UK economy, seeming to add weight to the chances of the Brexit vote resulting in an imminent slowdown in growth. With investors already lacking particular incentive to buy into the Pound this poor showing naturally resulted in a fresh downtrend for the weakened currency.
However, confidence in the South African Rand was also generally lacking, helping to mute some of the losses of the GBP ZAR exchange rate. The second quarter Consumer Confidence Index fell further, reaffirming the weakness that has been plaguing the South African economy in recent months. This pessimistic mood was heightened by a lower-than-expected Standard Bank PMI, which unexpectedly plunged into contraction territory in June. Altogether the outlook of the domestic economy seemed rather lacklustre, putting pressure on the Rand.
Wednesday subsequently saw the GBP ZAR exchange rate regaining some ground, in large part thanks to resurgent concerns over the political situation in South Africa. With domestic tension showing no real signs of easing and economists revising down their growth forecasts there was little reason for markets to favour the higher-risk Rand. The South African economy is now expected to grow at its slowest level in seven years in 2016, an assessment that prompted a round of short selling on local retail stocks and drove the Rand lower against rivals.
GBP ZAR Exchange Rate Hit Low Following US Payrolls Data
Demand for the Pound continued to pick up on Thursday, with markets encouraged by stronger-than-expected UK Industrial and Manufacturing Production figures. A higher level of industrial output for May suggested that the economy had been in a relatively robust shape ahead of the EU referendum. Even so, the boost from this data was somewhat limited thanks to the inevitable hit that production will have taken in the next couple of months at least. As the NIESR report also indicated that the UK’s GDP had faltered in June it wasn’t long before the GBP ZAR exchange rate returned to a slump.
The Rand was boosted strongly on Friday in the wake of the latest US Non-Farm Payrolls report, despite a bullish headline figure. Even though the number of jobs created in the US economy rebounded from May’s drastically disappointing level, investors were disappointed by underlying weakness in participation and wage growth. As a result the appeal of higher-yielding currencies strengthened substantially, with the odds of the Federal Reserve opting to raise interest rates in the near future seeming to dim further. This saw the GBP ZAR exchange rate plunge, hitting a fresh one-year low of 18.6882.
Weak South African Production Figures Forecast to Dent Rand
Markets were strongly reassured on Monday after rumours began to circulate that Conservative leadership candidate Andrea Leadsom was stepping out of the race. Sterling surged still higher once this was confirmed, with the contest for the post of Prime Minister ending some weeks before investors had expected. Although Prime Minister elect Theresa May had previously indicated that she would not activate Article 50 before the end of the year this failed to deter confidence.
The outlook of the South African economy is likely to remain muted in coming days, with Thursday’s Mining and Gold Production figures expected to show a further contraction in output. If confidence in the local economy continues to deteriorate then the Rand is expected to fall out of favour with investors, with no signs of an end to the current political tension in sight.
However, the GBP ZAR exchange rate is forecast to weaken in anticipation of the Bank of England’s (BoE) first post-Brexit policy meeting. There are expectations for policymakers to cut interest rates to a fresh low in response to the recent turmoil that has gripped the economy, a move that would undermine the appeal of the Pound. If the BoE defies predictions to leave rates unchanged, though, Sterling could well climb further away from its recent multi-year lows.