January’s South African production figures showed a general improvement, on the whole recovering from the contraction seen at the end of 2016. This encouraged investors to pile back into the Rand, particularly as the general appeal of higher-yielding assets picked up. Even though the domestic political situation remains volatile and the underlying fundamentals of the economy are underwhelming this was not enough to limit the bullishness of the Rand.
Confidence in the Pound, meanwhile, faltered as Wednesday’s raft of labour market data fell short of expectations. Disappointingly, wage growth was found to have slowed from 2.6% to 2.2% in the three months to January. This weaker showing does not bode well for the outlook of consumers, who’s spending power looks set to be squeezed further over the coming months. As a result, the GBP ZAR exchange rate softened.
Demand for the Rand surged in the wake of the Federal Reserve’s latest rate decision, as the central bank proved more cautious than anticipated. Although interest rates were raised in line with expectations, the Fed’s forecasts only pointed towards two more hikes in the remainder of the year. Investors were unimpressed by this slightly cautious pace of monetary tightening, sending the US Dollar sharply lower and improving the appeal of risk-sensitive currencies.
GBP ZAR Shored Up by Less Neutral BoE Meeting
The Bank of England’s (BoE) March policy meeting offered an unexpected boost to the GBP ZAR exchange rate, though, stemming some of the pairing’s losses. In a surprise move, Kristin Forbes voted for a 25bpt interest rate hike, even though the rest of the Monetary Policy Committee (MPC) remained in favour of leaving rates unchanged. This encouraged market hopes that the BoE could return to a more hawkish outlook in the near future, in spite of the fact that noted hawk Forbes will depart the MPC in June.
In another positive surprise for the Pound, UK inflation was found to have risen further than forecast in February. The consumer price index climbed back into the BoE’s target range at 2.3%, rising to its highest level since September 2013. This fuelled market speculation that a BoE interest rate hike could soon be back on the cards, setting the GBP ZAR exchange rate on an uptrend on Tuesday. However, with inflation now outpacing wage growth the outlook for UK households does not appear encouraging.
Falling South African Inflation Could Boost ZAR
The Rand could see renewed volatility on the back of the latest South African inflation data. Forecasts point towards inflation weakening from 6.6% to 6.3% on the year, which would signal progress back towards the South African Reserve Bank’s (SARB) target range. This would be a welcome improvement, giving more substantial support to ZAR exchange rates. If Fed policymakers continue to take a cautious view, meanwhile, risk appetite could remain stronger.
Brexit developments are likely to remain a negative influence on the Pound for the foreseeable future, with markets jittery over the impending activation of Article 50. Worries over Scotland and the future of the UK as a whole could limit the appeal of Sterling, even if Theresa May continues to dismiss the need for a second Scottish independence referendum.
In spite of signs pointing towards increased pressure on consumers, expectations for February’s UK retail sales figures are positive. Sales are forecast to have recovered from a contraction seen at the start of the year, giving investors some cause for confidence in the current health of the domestic economy. Any shortfall, though, could see the GBP ZAR exchange rate return to a slump.