The GBP ZAR exchange rate extended its downtrend on the back of June’s South African retail sales figures. As sales picked up further than forecast on the year this suggested that domestic consumers remain in a relatively robust state of confidence, in spite of ongoing political tensions.
While resilient consumer spending is unlikely to be enough to strengthen the South African economy in the longer term this was still enough to improve the mood towards the Rand.
Confidence in the Pound, meanwhile, remained limited even after the latest UK average weekly earnings data showed a surprise uptick. While this acceleration in wage growth could ease some of the persistent squeeze that household finances have been under in the wake of the Brexit vote this offered only limited relief to GBP exchange rates.
As the odds of the Bank of England (BoE) raising interest rates in the coming months remain distinctly limited this gave investors little incentive to favour the Pound.
Ahead of the weekend the risk-sensitive Rand leapt sharply as the general mood of market risk appetite picked up. As confidence in the abilities and longevity of the current US administration diminished in the wake of Trump’s response to violence in Charlottesville the US Dollar slumped, improving the appeal of higher-yielding assets. With doubts also mounting over the likelihood of the Federal Reserve raising interest rates a third time before the end of the year the Rand was able to rally strongly against its rivals.
Brexit Speculation Dominates GBP Outlook
Although the UK unexpectedly posted a public sector net borrowing surplus of 0.76 billion this failed to offer the Pound a particular boost on Tuesday. The underlying details of the data were less encouraging than the headline figure, as July benefitted from a disproportionate boost from a higher level of government tax receipts. Markets were also more concerned by the latest developments in the Brexit discourse, as the UK government continued to outline its position on key issues.
While the Conservatives have shown some signs of softening their stance on certain aspects of Brexit there is still a significant degree of separation between the UK and EU negotiating positions. With some months of discussions still to go the prospect of an acrimonious divorce remains, limiting the upside potential of GBP exchange rates.
Rand Could Extend Gains on Falling SA Inflation
Volatility looks likely on the back of July’s South African inflation data, with forecasts pointing towards a sharp dip from 5.1% to 4.6% on the year. This could offer further encouragement to the Rand, giving the South African Reserve Bank (SARB) less reason to alter monetary policy again in the near future. As long as the domestic economy continues to demonstrate signs of improvement this could limit the downside potential of the Rand, although the currency remains vulnerable to any fresh escalation in political tensions.
Investors do not expect to see any change in the second estimate of the second quarter UK gross domestic product, which should limit any GBP exchange rate volatility. However, as the more detailed picture of the economic conditions in the second quarter emerges this could give Sterling fresh cause for bearishness. If signs point towards the economy continuing to lose momentum heading into the third quarter this may weigh heavily on demand for the Pound, adding to worries over the domestic outlook.