Markets were pleased to hear that the South African inflation rate had fallen from 6.6% to 6.3% in February. While inflation is still above the South African Reserve Bank’s (SARB) target range this progress was positive for the Rand. If the domestic economy in general can show similar improvement this could give investors greater reason to favour the risk-sensitive currency, reducing the likelihood of a downgrade to its credit rating.
This prompted the GBP ZAR exchange rate to trend lower even in the wake of a raft of positive UK data. Although retail sales bettered expectations in February the underlying trend remains bearish. With inflation now outpacing wage growth UK households are set to see more of a squeeze on their earnings, limiting spending in the coming months. As a result growth seems likely to falter in the near future, eroding the appeal of the Pound as Brexit-based jitters start to bite once again.
ZAR Slumped Sharply on Political Developments
The mood towards the Rand worsened dramatically on Monday after it emerged that President Jacob Zuma had recalled finance minister Pravin Gordhan from an investor roadshow. Markets were spooked by the move, which is speculated to be a prelude to a cabinet reshuffle and potential sacking. As Gordhan has been integral to staving off a junk credit rating, the prospect of his departure put severe downside pressure on the Rand. If the rumours prove correct the GBP ZAR exchange rate could extend its uptrend even further.
Confidence in the Pound, meanwhile, has remained generally heightened in spite of the impending activation of Article 50. A large degree of Brexit-based uncertainty has already been priced into Sterling, limiting its bearish potential at this juncture. Investors were also encouraged by signs that the government could be toning down its hard-line rhetoric, reducing the chances of the UK exiting the EU without any form of deal agreed.
Brexit Uncertainty Forecast to Weigh on GBP ZAR
Volatility is likely in store for the GBP ZAR exchange rate in response to the SARB policy meeting. No change in interest rates is expected at this time, although markets will be keen to gauge the current outlook of policymakers. If the SARB indicates greater confidence in the domestic economy and the progress of inflation towards its target range then the Rand could be shored up. On the other hand, any suggestion that interest rates could be adjusted again would be negative for investor sentiment.
Political developments are expected to dominate the outlook of the Pound for the foreseeable future. Sterling is likely to remain vulnerable to shifts in market sentiment throughout the two-year exit process, with the outcome of negotiations still far from clear. If the signs start to point towards a hard exit the GBP ZAR exchange rate is likely to return to a weaker footing. Any indications that consumer sentiment is faltering could also put pressure on the Pound, given that the economy has been largely driven by consumer spending in the wake of the referendum.