Update: Risk Aversion Boosts Pound South African Rand (GBP/ZAR) Exchange Rate
Even with global geopolitical tensions easing the downside pressure on the Pound to South African Rand (GBP/ZAR) exchange rate remained limited on Tuesday.
With the US Dollar (USD) gaining ground ahead of the Federal Reserve’s May policy decision the appeal of the risk-sensitive South African Rand (ZAR) was generally muted.
As long as the Trump administration maintains a more protectionist stance and the threat of a US-China trade war persists the upside potential of ZAR exchange rates looks rather restricted.
Underwhelming UK Manufacturing Sector Limits Pound South African Rand (GBP/ZAR) Exchange Rate Gains
A disappointingly weak UK manufacturing PMI was not enough to keep down the Pound to South African Rand (GBP/ZAR) exchange rate, which despite the news has recovered further ground this week.
As growth in the manufacturing sector slowed to a seventeen-month low, snuffing out hopes of a rebound at the start of the second quarter, this put Pound (GBP) exchange rates under fresh downside pressure.
The odds of a May interest rate hike from the Bank of England (BoE) continued to plunge in the wake of the data, falling back into single digits.
However, while the Pound generally trended lower the relative weakness of the South African Rand (ZAR) helped to keep the GBP/ZAR exchange rate on a stronger footing for the time being.
GBP/ZAR Exchange Rate Shoots Higher as US Threatens to Withdraw USAID Funding
Although March’s South African trade balance bettered forecast, this failed to dent the Pound to South African Rand (GBP/ZAR) exchange rate.
While investors were encouraged by the trade figure returning to a state of surplus ZAR exchange rates failed to capitalise on this improvement, in part thanks to a bullish US Dollar (USD).
As the Trump administration issued a threat to cut off development funding for countries which fail to vote alongside the US in the UN the mood towards the Rand soured further.
With South Africa highlighted as one of the countries that votes with the US the least this naturally dented confidence in the domestic outlook.
If the US follows through with its threat this could threaten President Cyril Ramaphosa’s bid to turn the South African economy around, to the detriment of ZAR exchange rates.
Pound South African Rand (GBP/ZAR) Exchange Rate Vulnerable to Services PMI Weakness
Further pressure could be in store for the Pound to South African Rand (GBP/ZAR) exchange rate in the days ahead if the latest UK construction and services PMIs also fall short of forecast.
While forecasts point towards another rather muted month of activity within the construction sector hopes for the services PMI are a little more positive.
However, this leaves GBP exchange rates vulnerable to a sharp downwards move if the PMI fails to show evidence of stronger sector growth at the start of the second quarter.
As the service sector remains the main driving force of the UK economy a weaker showing here could erode market confidence further, cementing bets that the BoE will keep rates on hold in May.
With the UK economy looking set to lose further momentum over the coming months, in part thanks to lingering Brexit-based uncertainty, GBP exchange rates are likely to remain biased to the downside.
South African Manufacturing Sector Contraction Forecast to Boost GBP/ZAR Exchange Rate
Another weak showing from the South African manufacturing PMI may offer the Pound to South African Rand (GBP/ZAR) exchange rate a fresh boost on Wednesday.
With forecasts pointing towards another month of contraction for the manufacturing sector the Rand (ZAR) is likely to fall further out of favour over the coming days.
Even if the PMI shows some improvement this is unlikely to be enough to dent the GBP/ZAR exchange rate unless the measure returns to a state of expansion.
A more hawkish Federal Reserve could also boost the Pound to South African Rand (GBP/ZAR) exchange rate as this would diminish market risk appetite.