In a boost to the GBP ZAR exchange rate the fourth quarter South African gross domestic product report proved rather discouraging. GDP growth was found to have contracted on the quarter, clocking in at -0.3% rather than the more positive 0.5% that investors had anticipated. This highlighted the continued struggles of the South African economy, limiting the appeal of the Rand.
While markets were not particularly encouraged by the revised forecasts of the Office for Budgetary Responsibility the Rand was unable to capitalise on any resultant Pound weakness. In a signal that doesn’t bode well for hopes of a more hawkish Bank of England (BoE) the OBR lowered its forecast for wage growth. Given that consumer spending has been one of the key drivers of the domestic economy in the wake of the EU referendum the fear of an increased earning squeeze weighed heavily on Sterling.
The appeal of the risk-sensitive Rand weakened further ahead of the weekend thanks to a stronger-than-expected US non-farm payrolls report. As 235,000 jobs were added to the US economy in February the odds of the Federal Reserve raising interest rates at its March meeting rose to a near certainty. As a result investors were encouraged to pile back into the US Dollar, at the expense of the Rand, raising the prospect that the Fed will pursue a more aggressive course of monetary tightening over the coming months.
GBP ZAR Under Pressure from Brexit Developments
Confidence in GBP exchange rates plunged in the wake of parliament voting to approve the government’s Article 50 bill without amendment. While this enables Theresa May to trigger formal exit proceedings before the end of the month the vote was not enough to eliminate the greater sense of uncertainty surrounding Brexit. Investors were particularly spooked by the news that Nicola Sturgeon will pursue a second referendum on Scottish independence, once again raising the risk of the UK splitting. With little to distract from market speculation the GBP ZAR exchange rate saw a sharp downtrend in response to these renewed Brexit jitters.
South African production figures offered support to the Rand, meanwhile. Mining output proved particularly encouraging, showing a solid increase of 1.7% on the month after December’s -0.3% contraction. A moderate recovery in gold and manufacturing production on the year equally boosted the Rand, suggesting that the economy started the year on a more resilient footing. Even so, with commodity prices still under pressure the GBP ZAR exchange rate trended narrowly in response to the data.
Volatility Forecast in Response to Fed and BoE Meetings
Despite the fact that markets have already priced in a 25bpt interest rate hike from the Fed this may not prevent the Rand from experiencing further selling in the latter half of the week. If Fed Chair Janet Yellen adopts a more hawkish tone on monetary policy than anticipated this could see risk appetite weaken further. The prospect of multiple rate hikes throughout the remainder of the year would not be viewed positively for the Rand, leaving it vulnerable to even the softer Pound.
However, the GBP ZAR exchange rate could be prompted to trend lower if the BoE’s March policy meeting fails to excite investors. While policymakers are expected to hold steady for the foreseeable future any signs of a shift the outlook of the Monetary Policy Committee (MPC) could still provoke Pound volatility. Should the BoE appear to be leaning towards dovishness, especially if the latest wage data proves weak, Sterling could extend its recent losses across the board.