The UK Consumer Price Index for December proved unexpectedly strong, with inflation rising from 1.2% to 1.6% on the year. This was a greater feed-through of inflationary pressure than investors had expected, suggesting that consumers are likely to experience a greater squeeze on earnings and spending in the coming months. Even so, this did not dent the Pound South African Rand exchange rate, which trended higher on hopes of the Bank of England (BoE) being encouraged to return to a tightening bias sooner rather than later.
Sterling was prompted to soar, however, in the wake of Theresa May’s first major speech on the issue of Brexit. Although this included confirmation that the government is not seeking to maintain continued membership of the single market, the initial reaction of investors was positive. The greater degree of certainty that the speech offered, despite still lacking in some crucial details, offered strong encouragement to the Pound. As a result the GBP ZAR exchange rate jumped 41 cents higher on Tuesday afternoon.
Rising South African Inflation Weighed on Rand Outlook
Demand for the Rand, meanwhile, weakened in response to an unexpected uptick in annual inflationary pressure. Rather than falling to 6.5% as forecast, inflation rose to 6.8% in December, indicating that the South African Reserve Bank’s (SARB) attempts to curb rising price pressures have failed to produce results. While the SARB is expected to leave interest rates unchanged at its January policy meeting, this disappointing result will nevertheless put increased pressure on policymakers to consider further loosening measures.
Ahead of the weekend the appeal of the Pound was dented by unexpectedly weak December retail sales figures, which clocked in at growth of 4.9% on the year rather than the 7.5% that had been forecast. This shortfall raised concerns that consumer confidence could already be fading, even before higher inflation and middling wage growth put more pronounced strain on spending. However, the GBP ZAR exchange rate remained on an uptrend thanks to an increased sense of market risk aversion in anticipation of the new US administration taking office.
Article 50 Ruling and Fourth Quarter UK GDP in Focus
Volatility for the GBP ZAR exchange rate should be expected when the Supreme Court hands down its ruling in the Article 50 case. Markets anticipate that the judges will rule that Parliament should have a vote on triggering the formal exit process from the EU; something which would be seen to limit the likelihood of a hard Brexit. This could boost the Pound, even if such a ruling could potentially throw out Theresa May’s timetable.
Investors will be keen to gain some insight into the minds of SARB policymakers, given the recent disappointing trend in domestic data. If there are signs that further interest rate cuts could be on the table, the appeal of the Rand is likely to weaken substantially, especially if the recent bearish market mood persists. With the outlook of the South African economy still far from encouraging the Rand may struggle to find support in the near future.
Confidence in the resilience of the UK economy, meanwhile, could weaken if the fourth quarter Gross Domestic Product report fails to impress. Forecasts point towards a slight moderation in growth, which is expected to dip from 0.6% to 0.5% on the quarter. This could put fresh downside pressure on the Pound, given that the UK’s future outside the EU still remains far from clear.