Pound Sterling to South African Rand (GBP/ZAR) Exchange Rate Sinks as UK Construction Contracts

Construction Sector Contraction Adds to Pound Sterling South African Rand (GBP/ZAR) Exchange Rate Weakness

As the UK construction PMI saw a second consecutive month of contraction this left the Pound Sterling to South African Rand (GBP/ZAR) exchange rate on a weaker footing this morning.

Although the construction sector only accounts for a small fraction of the UK gross domestic product this latest sign of weakness still weighed on Pound Sterling (GBP).

The rising odds of the UK crashing out of the EU without a deal this month also put GBP exchange rates under pressure, with MPs failing to make any progress towards a positive resolution.

With no alternative to Theresa May’s already rejected Brexit deal finding sufficient support in Parliament the Pound softened, falling as worries over the future of the UK economy mounted once again.

Risk Appetite Shores up South African Rand (ZAR) Exchange Rates

After South Africa avoided a ratings downgrade from Moody’s last week pressure on the South African Rand (ZAR) has been limited.

The relative weakness of the US Dollar (USD) has also helped to support ZAR exchange rates, with risk appetite increasing in the face of underwhelming US data.

However, confidence in the outlook of the South African economy remains generally muted in the face of slowing global growth.

This leaves the South African Rand vulnerable to any deterioration in market risk appetite, especially if trade talks between the US and China show any signs of stalling once again.

Signs of Weaker South African Growth Set to Dent South African Rand (ZAR)

Tomorrow’s release of the Standard Bank PMI could see ZAR exchange rates return to a weaker footing, with forecasts pointing towards the index slipping into contraction territory.

Evidence that private sector activity sank back into contraction after a single month of expansion could encourage a fresh sell off of the Rand.

Unless the domestic economy shows greater signs of resilience the GBP/ZAR exchange rate could return to a stronger footing, recovering from its recent bout of weakness.

A weaker-than-expected showing, on the other hand, would further undermine confidence in the health of the South African economy, leaving investors with little incentive to favour the Rand.

Softening UK Service Sector to Add to GBP/ZAR Exchange Rate Weakness

Further bearishness could be in store for the Pound, meanwhile, if March’s UK services PMI shows signs of a slowdown.

With the index forecast to ease from 51.3 to 51.0, signalling a weakening in sector growth, GBP exchange rates look vulnerable to fresh losses.

As the UK service sector accounts for more than three quarters of the gross domestic product any signs of weakness here would point towards the economy ending the first quarter on a soft footing.

However, even if the services PMI prints positively the mood towards the Pound could still sour in response to the latest Brexit developments.

Without signs of progress towards a mutually agreeable deal the GBP/ZAR exchange rate is likely to remain biased to the downside for the foreseeable future.

Louisa Heath

Contact Louisa Heath