Although the government’s Article 50 bill passed through the House of Commons without amendment this failed to weigh on the GBP ZAR exchange rate for long. While this increased the odds of Theresa May continuing to pursue a hard line approach to Brexit the bill could still face challenge in the House of Lords. As a result the government does not yet have the blank cheque for negotiations that some feared.
The Rand, on the other hand, came under fresh pressure as December’s raft of South African production figures generally disappointed. Manufacturing and mining output were both found to have contracted further on the year, undermining confidence in the resilience of the economy. Even so, as commodity prices were encouraged higher by renewed US Dollar weakness, this downtrend was not long-lived.
Unexpectedly strong Chinese trade data also weighed on the GBP ZAR exchange rate ahead of the weekend. Fresh signs of the strength of the world’s second largest economy helped to boost the appeal of the higher-yielding Rand, shoring up metal prices as China’s imports were found to have risen bullishly in January.
Pound Weighed Down by Underwhelming Inflation Data
Demand for the Pound plunged dramatically on Tuesday after the latest UK inflation figures failed to live up to expectations. Forecasts had pointed towards an uptick from 1.6% to 1.9% on the year in January, leading to disappointment when the figure ultimately clocked in at 1.8% instead. While this still demonstrated the rapid increase in inflationary pressure within the domestic economy, as the weakness of the Pound and rising import prices continue to feed through, investors were nevertheless discouraged.
With inflation showing slower progress towards the Bank of England’s (BoE) 2% target the likelihood of policymakers adopting a more hawkish view on interest rates was seen to diminish. With one of the Monetary Policy Committee’s prominent hawks also set to depart from the Bank in the coming months the prospect of policy tightening appeared to have slimmed.
Rising South African Inflation Could Weaken Rand
UK wage data for December could offer the GBP ZAR exchange rate a rallying point on Wednesday, though, if earnings are found to have risen further than expected at the end of 2016. As rapidly rising inflation could herald a fresh squeeze on wages any softness here could discourage the Pound further. Given that high levels of consumer spending have been helping to maintain the resilience of the UK economy in recent months, anything which could negatively impact sentiment may undermine confidence in Sterling.
The Rand, meanwhile, could come under pressure if South Africa’s inflation rate continues pointing towards rampant price pressures within the domestic economy. If inflationary pressure fails to show any significant signs of easing then the chances of another interest rate hike from the South African Reserve Bank (SARB) will rise. With the central bank struggling to control domestic inflation and the general outlook of the economy still in doubt, a poor showing here would dent the risk-sensitive Rand.
Further downside pressure for ZAR could stem from any weakness evidenced by December’s retail sales data. After a strong increase in sales in November the figure is likely to have fallen back at least somewhat, with consumer spending likely to be increasingly squeezed if economic conditions do not pick up more substantially in coming months. This could see the GBP ZAR exchange rate recover some ground, although the pairing could struggle to gain any particular traction if risk appetite remains heightened.