In spite of a lack of particularly supportive UK data the GBP ZAR exchange rate rallied sharply during the last week.
This was largely thanks to comments from Bank of England (BoE) Governor Mark Carney which markets interpreted to be more hawkish in tone.
Carney’s note that he would be willing to vote for an interest rate hike once economic conditions warranted it prompted investors to pile back into the Pound, even though his general outlook remained decidedly dovish.
With speculation rising that the BoE could tighten monetary policy as soon as its next policy meeting the Pound was encouraged to go on a bullish run against its rivals.
Confidence in the South African Rand has continued to generally deteriorate, meanwhile, particularly as the wider sense of market risk appetite weakened.
A modest uptick in May’s producer price index figures did nothing to boost the emerging market currency, instead offering investors fresh incentive to sell out of the Rand.
This increase in prices suggests that inflationary pressure within the South African economy remains high, potentially raising the prospect of the South African Reserve Bank (SARB) taking fresh policy action.
BoE Divide Continues to Drive GBP Volatility
Signs continued to point towards an increased divide within the BoE on Tuesday, with comments from policymakers Ian McCafferty and Gertjan Vlieghe garnering attention.
Unsurprisingly, McCafferty continued to pursue a hawkish line of rhetoric, suggesting that he will still vote in favour of an immediate interest rate hike at the next monetary policy meeting.
This was rather at odds with the opinion of Vlieghe, who noted that there is a greater danger in raising interest rates too soon rather than a little late.
While this pointed towards an eventful August BoE meeting, though, the contrast in opinions effectively cancelled each other out to leave the Pound lacking in particular direction.
Weaker-than-expected UK manufacturing and construction PMIs do not appear to bode overly well for the underlying strength of the domestic economy, or the corresponding services PMI.
If the economy continues to demonstrate signs of slowing this could weigh heavily on the appeal of Sterling, reducing the likelihood of the return of a hawkish BoE.
Given that the service sector remains the primary engine of the UK economy a soft showing here may prove particularly discouraging to investors.
Any downside surprise from the services PMI could see the GBP ZAR exchange rate reversing at least some of its recent gains.
Rand to Remain Under Pressure from Politics
If a sense of political uncertainty continues to mount in South Africa the Rand may struggle to capitalise on any weakness in the Pound.
While an impending vote on a motion of no confidence in President Jacob Zuma is more than a month away this is nevertheless likely to hang over the Rand in the near term. So long as signs continue to point towards political infighting and domestic instability the GBP ZAR exchange rate is likely to hold onto a stronger footing.
Demand for higher-yielding assets could also weaken in response to the latest Federal Reserve meeting minutes.
Any indication that the Fed is prepared to raise interest rates again at its July meeting would put the Rand under renewed pressure.
Given the worries surrounding the domestic economy investors are unlikely to see any particular reason to favour the Rand if the wider sense of market risk appetite diminishes.