Stronger-than-expected UK consumer credit and mortgage approvals figures helped to set the GBP ZAR exchange rate on a bullish run last week, with confidence within the UK economy appearing to remain robust in the face of ongoing Brexit-based uncertainty. This encouraged investors to pile back into the Pound, supporting hopes that the Bank of England (BoE) will remain in no particular hurry to ease monetary policy further.
Confidence in the Rand, on the other hand, softened in response to the South African M3 money supply for October. Rather than weakening as forecast, the measure instead climbed from 5.64% to 6.62%, pointing towards a still elevated level of domestic inflationary pressure. This would seem to put more pressure on the South African Reserve Bank (SARB) to consider raising interest rates in order to rein in rampant inflation.
Further support for the GBP ZAR exchange rate came from the fourth quarter South African business confidence index, which dipped from 42 to 38. These fresh signs of weakness within the economy did not offer much encouragement to investors, particularly as political worries continued to overshadow the Rand. As President Jacob Zuma survived the latest challenge to his position, hopes for the economy remained generally limited.
GBP ZAR Exchange Rate Weakened as South Africa Narrowly Escapes Rating Downgrade
The BoE’s Financial Stability Report did not paint an overly positive picture of the UK economy last Thursday but highlighted the risks that face the financial sector at this juncture. Comments from Governor Mark Carney served to reiterate the fragility of the sector’s outlook as a result of uncertainty related to the future shape of the UK’s relationship with the EU. Nevertheless, with risk appetite generally limited by the bullishness of the US Dollar, the GBP ZAR exchange rate remained on a strong footing.
There was a reprieve for the Rand ahead of the weekend as Standard & Poor’s opted not to downgrade South Africa’s credit rating, contrary to market expectations. However, S&P maintained its negative outlook on the South African economy, limiting the positive impact of the news as the prospect of a downgrade looks set to hang over the Rand for some time to come.
A strong reading on November’s UK Services PMI helped to shore up the GBP ZAR exchange rate on Monday, with the sector continuing to demonstrate resilience despite persistent market jitters. Strengthening from 54.5 to 55.2, this result encouraged investors to buy back into the Pound despite the start of the Supreme Court hearing on Article 50 threatening to reignite Brexit-based worries once again.
Slowing South African GDP Forecast to Weigh on Rand Demand
Tuesday’s South African Gross Domestic Product data could undermine the appeal of the Rand, with growth forecast to have softened considerably on the quarter. Unless the domestic economy shows significant signs of picking up then the GBP ZAR exchange rate is likely to make further gains. With political change eluding South Africa the Rand is expected to struggle to hold on to any particular strength, although any rise in base metal prices could offer the commodity-correlated currency a temporary boost.
The NIESR GDP estimate may diminish the appeal of the Pound providing that the assessment of the UK economy remains muted. October’s industrial and manufacturing production figures are also set to provoke Sterling volatility, although investors are expecting to see a modest uptick in output on the year. So long as domestic data remains generally solid then the GBP ZAR exchange rate can be expected to maintain an uptrend.