Politics has been the main driver of the Pound Sterling to South African Rand exchange rate this week, with the Brexit and criminal charges against the SA Finance Minister serving to keep the currency pairing in uncertain territory. GBP ZAR exchange rates have trended between 17.1 and 17.7 over the past seven days.
Speculation over ‘Hard Brexit’ Continues to Unsettle Pound Exchange Rates
A leaked Treasury report that suggested the UK budget could be -£66 billion worse off in the event of a ‘Hard Brexit’ was the first of many pieces of news last week to deter investors from buying into the Pound. Sterling did gain some support on Wednesday after Prime Minister Theresa May performed an apparent U-turn on her claims that Parliament wouldn’t be allowed to debate the UK’s Brexit negotiation tactics. The fact that multiple MPs from all parties lambasted the government’s seeming lack of plan or preparation helped boost market confidence that a total split from the EU would not materialise.
But in a packed week of news and speculation, it was a battle for the supermarket shelves that demanded the most attention. Investors reacted badly to the news that Unilever products – which include Marmite, Dove, PG Tips and Magnum – could disappear from Tesco shelves as the retailer resisted attempts by the supplier to hike prices by 10%. Unilever blamed the weakened Pound for the hike; even though the situation was quickly resolved on Friday, it served as an ominous foreshadowing of what could be on the way for UK consumers.
South African Rand Crashes; Fraud Charges Levelled at Finance Minister
The South African Rand to Pound Sterling exchange rate has been extremely volatile during the past few days due to further political unrest in South Africa. Finance Minister Pravin Gordhan has been charged with fraud over an early retirement package he approved for an ex-colleague, who was later hired as a consultant. However, markets and political commentators are largely of the opinion that the attempt to prosecute Gordhan is an ploy by President Jacob Zuma to remove the Finance Minister from office. Gordhan, who returned to office after Zuma replaced his predecessor for objecting to his lavish government spending, has been at odds with the President as he tries to get South Africa’s budget under control in order to stave off a potential credit rating downgrade.
Since the moment it was reported that Gordhan may be arrested the Rand has experienced turbulent trading.
Pound Remains Weak as Consumer Price Index Acceleration Shocks Markets
Today’s UK consumer price indices have failed to provide the Pound with any support. Normally an above-forecast surge in price growth would be met with investor jubilation, as it would move the Bank of England (BoE) close to hiking interest rates and therefore raising the value of the Pound. However, today’s CPI has caused GBP to weaken because it has moved inflation closer to overshooting the BoE’s target range due to the pressures from the already weakened Pound.
Monthly consumer price growth still edged down, although only from 0.3% to 0.2% instead of to 0.1%, while year-on-year prices grew 1% rather than climbing from 0.6% to 0.9% as forecast. Core price growth clocked in at 1.5%, a twenty basis point increase. The BoE had previously commented that it would ignore strong inflationary growth due to the distortion on prices from the weak domestic currency, instead focussing on the wider health of the economy. Such a strong rise so soon after the referendum will have caused investors to worry over just how rapidly price growth will overheat.
GBP ZAR Exchange Rate Forecast; Could Inflation Breach SARB Target and Prompt Hike Speculation?
The Pound reacting to some domestic data marks a refreshing change after two weeks of ‘Hard Brexit’ speculation. Whether this will continue tomorrow remains to be seen. UK unemployment data and average earnings could spark further movement for GBP, especially if average earnings show weak wage growth, which will make it harder for consumers to absorb the cost of rising prices.
Meanwhile, South Africa is set to release inflation data for September. After deflation in August, month-on-month price growth is predicted to print at 0.1%, while the core inflation rate on the year is expected to edge lower from 5.7% to 5.5%. On the year non-core inflation, however, is forecast to rise out of the South Africa Reserve Bank’s (SARB) target range of 3-6%.
Price growth is only forecast to rise ten basis points above the target range, which is unlikely to cause particular disruption to the markets, but the first rumours of potentially ‘hot’ inflation could stoke demand for the South African Rand, as if the trend continues SARB may have to hike interest rates again, boosting the domestic currency.