South African inflation retreated from 5.1% to 4.6% on the year in July, even though the monthly measure showed a fresh uptick. This slowdown in inflationary pressure offered some support to the Rand, suggesting that the South African Reserve Bank (SARB) will be in less of a hurry to alter monetary policy in the near term. With inflation at its lowest annual level since October 2015 the GBP ZAR exchange rate came under pressure, encouraging bets that South Africa could climb out of its recession.
Confirmation that the growth in the UK economy had rebounded to 0.3% in the second quarter soon shored up the Pound, though. While the underlying details of the latest gross domestic product report were not overly positive this failed to particularly weigh on Sterling. As the BBA loans for house purchase figure also pointed towards a more resilient UK housing market the GBP ZAR exchange rate was able to recover much of the previous day’s losses.
As Federal Reserve Chair Janet Yellen failed to adopt a particularly hawkish tone in her appearance at the Jackson Hole economic symposium the general mood of market risk appetite picked up ahead of the weekend. Lower odds of the Fed raising interest rates before the end of the year encouraged investors to pile back into higher-yielding assets, helping to boost the Rand once again.
Low Hopes for Brexit Talks Dented Pound
Brexit jitters also pushed the GBP ZAR exchange rate lower, with markets nervous as the UK and EU delegations prepared to return to the negotiating table. With this latest round of talks considered unlikely to offer any significant progress the mood towards the Pound quickly started to sour once again. As the two sides remain at odds even over the sequencing of talks, and whether a future relationship can be discussed before the exit bill is settled, GBP exchange rates remained generally biased to the downside.
However, the Rand struggled to extend its gains as markets returned to a state of risk aversion in the wake of a North Korean missile launch. As geopolitical tensions showed fresh signs of escalating the appeal of the risk-sensitive Rand naturally weakened, with markets instead favouring safe-haven currencies. Fresh weakness in the US Dollar also helped to shore up ZAR exchange rates as commodity prices strengthened.
The mood towards the Pound picked up on Wednesday, though, after a smaller-than-expected uptick in UK net consumer credit. Given that Bank of England (BoE) policymakers had previously issued warnings over the increasing reliance on credit as household finances are squeezed this result was naturally greeted. While this is unlikely to prompt the BoE to adopt a more hawkish policy outlook in the near future the GBP ZAR exchange rate was still able to capitalise on this positive data.
Weaker South African PPI Could Boost Rand
Further volatility seems likely for Sterling in the coming days as the latest raft of UK PMIs are published. If signs point towards the economy losing further momentum in the third quarter this could weigh heavily on GBP exchange rates. On the other hand, if economic activity continues to hold up this could offer the Pound a fresh rallying point. Even so, developments regarding Brexit are likely to remain the primary influence on Sterling in the near term.
Confidence in the Rand, meanwhile, could pick up if July’s producer price index data also points towards diminishing inflationary pressure. As long as the South African economy demonstrates signs of recovery this should limit the downside potential of ZAR exchange rates, even if market risk appetite deteriorates once again.