Even though producer prices saw a more limited uptick in June this was not enough to boost the South African Rand. While this pointed towards an easing in domestic inflationary pressure investors failed to take any particular encouragement from the figures, given the sense of unrest surrounding the South African Reserve Bank (SARB) at present.
With risk appetite generally faltering this allowed the GBP ZAR exchange rate to trend higher ahead of the weekend.
Ratings Downgrade Threat Weighs on South African Rand
A sharp slump in the South African manufacturing PMI put the Rand under further pressure on Tuesday morning, with the sector posting its sharpest contraction since August 2009. This naturally dented confidence in the underlying health of the domestic economy, particularly as political tensions in the country remain.
Investors were equally spooked by a warning from ratings agency Moody’s, which cautioned that political influence on economic policy is growing. This suggested that the agency could be poised to downgrade South Africa’s rating later in the month; a worrying development considering that Moody’s is currently the only one of the three major ratings agencies to rank the country as investment grade.
Fears of a potential downgrade weighed heavily on the Rand, helping to boost the GBP ZAR exchange rate to its highest level since May.
The mood towards the Pound picked up, meanwhile, even after Downing Street issued a statement seeking to quash speculation that the UK could be heading for a softer form of Brexit.
July’s UK manufacturing PMI showed a solid uptick on the month, rising from 54.2 to 55.1 as the sector continued to experience resilient growth. Markets took this as a positive sign ahead of the corresponding construction and services PMIs, even though the general outlook of the UK economy remains clouded by persistent Brexit-based uncertainty.
Dovish BoE Could End GBP ZAR Exchange Rate Bull Run
Ultimately the GBP ZAR exchange rate may struggle to hold onto its recent gains for long, however, as jitters look set to increase ahead of Thursday’s Bank of England (BoE) policy meeting.
Investors are keen to get a fresh gauge of opinion amongst the Monetary Policy Committee (MPC), even though any major shift in monetary policy looks distinctly unlikely at this juncture.
Any indications that the balance of the MPC is starting to tilt in the favour of the hawks, though, could encourage the Pound to trend higher across the board.
Focus will also fall on the latest quarterly Inflation Report, with any downward revisions to the BoE’s forecasts likely to dent the appeal of Sterling.
If the Standard Bank PMI remains in a state of contraction this could see the Rand cede further ground to its rivals this week.
Any further deterioration of activity within the private sector would add to concerns over the outlook of the South African economy, particularly if commodity prices remain under pressure.
Developments in wider market sentiment could equally undermine demand for the Rand, with rising global geopolitical tensions giving investors less reason to favour risk-sensitive assets.