A further acceleration in UK inflation prompted fresh gains for the GBP ZAR exchange rate, increasing the odds of an imminent Bank of England (BoE) interest rate hike.
As the headline consumer price index jumped from 2.9% to 3.0% on the year, this encouraged investors to pile back into Sterling, with a November rate hike looking even more certain.
Although this also signals an intensification of the domestic wage squeeze, the mood towards the Pound nevertheless improved on Tuesday morning.
ZAR Exchange Rates Could Bounce Back if SARB Rate Hike Odds are Altered
South African Rand (ZAR) exchange rates could recover ground later in the week as forecasts point towards an uptick in domestic retail sales in August.
Any signs that domestic consumer confidence remains strong in spite of ongoing political uncertainties are likely to improve the appeal of the Rand.
However, the primary focus of investors will fall on the latest South African inflation data.
As markets are still betting on the prospect of the South African Reserve Bank (SARB) cutting interest rates again before the end of the year, the Rand faces significant downside pressure.
If inflationary pressure mounts further this could give the SARB extra incentive to take action, increasing the odds of a November rate cut.
Conversely, a weaker reading may encourage further policymaker reticence and prompt the SARB to sit still once again, to the benefit of South African Rand (ZAR) exchange rates.
Pound Sterling (GBP) Could Reverse Gains on Weak UK Wage Growth
If Wednesday’s UK average weekly earnings figure disappoints this could knock the wind out of the GBP ZAR exchange rate’s sails.
While wage growth is expected to have remained steady at 2.1% in the three months to August, this would still represent a significant lag behind the acceleration in inflationary pressure.
The increasing squeeze on household finances does not bode well for the outlook of the UK economy as a whole, given that high levels of consumer spending have helped to drive growth in recent months.
Any indication that consumers are likely to continue tightening their belts and reining in spending could weigh heavily on the Pound, especially as Brexit-based uncertainty looks set to persist for some time to come.
This could be compounded if September’s UK retail sales data indicates that spending has already started to weaken. That being said, if sales continue to hold up then any downside for the GBP ZAR exchange rate could prove limited.
Risk Appetite May Benefit South African Rand (ZAR) Outlook
Further volatility could be in store for the Pound Sterling to South African Rand (GBP/ZAR) exchange rate on the back of the third quarter Chinese gross domestic product report as market risk appetite shifts.
As recent Chinese data has painted a stronger picture of the global economic outlook, another positive showing here could improve the appeal of emerging-market currencies such as the Rand.
If growth in China fails to show signs of acceleration, though, this could instead offer the GBP ZAR exchange rate a rallying point, with commodity prices likely to weaken in response.
Commentary from Federal Reserve Chair Janet Yellen may also dent demand for the Rand ahead of the weekend, with rising expectations for an imminent interest rate hike set to weigh on risk appetite.