Theresa May’s unexpected call for a snap general election prompted significant volatility for the GBP ZAR exchange rate. While investors were initially unsettled by the announcement, the Pound soon rallied on speculation that the Conservatives will sweep the vote. In spite of the hard line of rhetoric that May has maintained, there were hopes that an increased government majority could lead to a softer exit from the EU. Expectations that political uncertainty will be reduced in the longer term also encouraged demand for Sterling.
The Rand found support on the back of March’s South African inflation data, which unexpectedly weakened on the year. As inflationary pressure eased from 6.3% to 6.1% on the year the pressure on the South African Reserve Bank (SARB) was seen to decrease. With inflation edging back towards the central bank’s target range of 3-6% policymakers face less incentive to raise interest rates further, helping to boost confidence in the outlook of the domestic economy. Even so, this failed to knock the GBP ZAR exchange rate off its bullish trend.
French Election Result Boosted Risk Appetite
Risk appetite surged in the wake of the first round of the French presidential election, with markets encouraged by the accuracy of opinion polls. With hopes heightened that centrist Emmanuel Macron will defeat Eurosceptic Marine Le Pen in the final run-off, investors piled back into higher-yielding assets. Even though global geopolitical tensions persist this was not enough to hamper the Rand, leaving the GBP ZAR exchange rate on a weaker footing at the start of the week.
Confidence in the Pound was rattled by a marked deterioration in the CBI business optimism index, which dipped from 15 to just 1 for the second quarter. While the index did not return to negative territory, this weaker showing does not appear to bode overly well for the UK economy. As election uncertainty is likely to weigh on the business outlook in the coming weeks economic activity could slow further. With the housing market showing fresh signs of slowing there was little in the way of support for Sterling at this juncture.
Higher Producer Prices Could Weigh on Rand
Worries over the health of the UK economy could mount further if March’s public sector net borrowing figure points towards an increased level of government debt. An increased deficit could highlight the potential economic vulnerability as the formal start of Brexit negotiations draw closer. Given the UK’s reliance on trade and international borrowing, a wider deficit would suggest that the negative impact of a hard Brexit would be more severe, reducing the appeal of the Pound.
Even if political worries remain a limited influence on the Rand in the near term, the latest producer price index figures could create some downside bias. Contrary to the decline in the consumer price index forecasts point towards a sharp uptick in producer price inflation in March. This could signal that South Africa’s inflation worries are still far from over, leaving the possibility of fresh SARB action on the table. If March’s trade balance returns to a deficit then investors may find little cause for continued confidence in the Rand.