Although South African inflation picked up from 4.6% to 4.8% on the year in August this failed to particularly weigh on the Rand. Investors were relieved that inflationary pressure had not seen a sharper increase, particularly as the monthly measure actually showed a modest easing.
While there are still concerns that the South African Reserve Bank (SARB) is struggling to keep domestic inflation under control this was enough to dent the GBP ZAR exchange rate on Wednesday.
Even in the wake of this positive showing, though, investors were caught off guard as the SARB opted to leave interest rates on hold at its September meeting. As many economists had anticipated a rate cut at this juncture the Rand leapt in response, in spite of a relatively hawkish Federal Reserve policy announcement.
However, the Monetary Policy Committee (MPC) proved distinctly split over the move, with a number voting in favour of an immediate interest rate cut. This suggests that the central bank could still ease monetary policy before the end of the year, somewhat limiting the upside potential of the Rand.
Brexit Jitters and UK Rating Downgrade Dent GBP ZAR
Markets reacted poorly to Theresa May’s Florence speech ahead of the weekend, meanwhile, with the GBP ZAR exchange rate dropping sharply in spite of the mention of a possible transitional deal. As the major points of the speech had already been reported there was little to distract from concerns that the Conservative government still lacks any real clarity on its aims for Brexit.
As Moody’s unexpectedly announced that it had downgraded the UK credit rating from Aa1 to Aa2, in view of domestic uncertainty, this added to the bearishness of GBP exchange rates. With the economic outlook remaining decidedly mixed and jitters over the latest round of Brexit talks mounting the Pound shed further ground on Friday evening.
With the UK and EU negotiating teams still appearing largely at odds over key issues the GBP ZAR exchange rate has remained under pressure. Even with the general sense of global political uncertainty mounting the appeal of the Pound is still somewhat limited, with Brexit talks showing no significant signs of progress even as the March 2019 deadline approaches.
Rising UK Consumer Credit Could Deter BoE Hawks
Comments from BoE Governor Mark Carney could offer the GBP ZAR exchange rate a rallying point, assuming that he maintains a hawkish policy outlook. Any encouragement to the prospect of an imminent interest rate hike is likely to boost the appeal of the Pound, even though markets have already priced in high odds of a 2017 move.
On the other hand, if August’s UK net consumer credit figure shows an increase in borrowing this could weigh heavily on Sterling. Given the BoE’s repeated warnings over the increasing reliance on credit amongst consumers an increase here may give policymakers cause for hesitation, highlighting the risk of higher interest rates.
A narrowing of South Africa’s trade surplus could weaken the appeal of the Rand, meanwhile, with forecasts pointing to a significant dip on the month. Any fresh signs that the South African economy is weakening in response to domestic political tensions are likely to boost the GBP ZAR exchange rate.