South African manufacturing production continued to underperform in May, with output still contracting on both the month and the year. This underlined the muted outlook of the domestic economy, even as concerns over the proposed nationalisation of the South African Reserve Bank (SARB) eased.
Coupled with a general increase in market risk aversion, spurred by disappointing Chinese data, this left the Rand on a weaker footing against many of its rivals.
However, the GBP ZAR exchange rate struggled to hold onto its gains for long as the latest UK average weekly earnings data proved discouraging.
As wage growth slowed to just 1.8% in the three months to May the squeeze on household finances looked set to deepen further for some time to come.
Even though the corresponding unemployment rate was found to have unexpectedly dropped to 4.5% this was not enough to offset the disappointing wage data, leaving the Pound rather lacking in support.
Weaker UK Inflation Prompted GBP ZAR Slump
The mood towards the Rand picked up ahead of the weekend, meanwhile, on the back of growing doubts over the prospect of another 2017 Federal Reserve interest rate hike.
As US inflation failed to edge closer to the Fed’s target range markets were inclined to revise their bets on the likelihood of the central bank pursuing a more aggressive course of monetary tightening.
This offered a rallying point to the emerging-market Rand, with demand for higher-yielding currencies rising as a result of this fresh bout of US Dollar softness.
Confidence in the Pound plunged sharply on Tuesday morning, diminished by a surprisingly softened UK consumer price index.
Inflationary pressure unexpectedly dipped from 2.9% to 2.6% in June, slightly easing the pressure on household finances even though the figure still remains well in excess of domestic wage growth.
This softening in inflationary pressure diminished market hopes that the Bank of England (BoE) could return to a tightening bias in the coming months, prompting the GBP ZAR exchange rate to slump sharply.
SARB Forecast to Leave Interest Rates on Hold
Volatility could be in store for the Rand if South Africa’s inflation data proves uninspiring. Markets are hoping to see inflation dip from 5.4% to 5.2% in June, moving closer to the middle of the SARB’s target range.
On the other hand, if inflationary pressure rises this could create a greater sense of uncertainty ahead of Thursday’s interest rate decision. While there are few expectations that policymakers will opt to cut rates at this juncture the meeting is likely to be more dovish in tone, limiting the appeal of the Rand.
A rallying point could also be in store for the GBP ZAR exchange rate if June’s UK retail sales figures indicate that consumer spending bounced back on the month.
Given that high levels of consumer spending have helped to shore up the economy in the wake of the EU referendum a solid uptick in sales could bode well for domestic growth.
However, as households are becoming increasingly reliant on credit to finance their spending any positive impact from a stronger showing here could prove relatively fleeting.