Irish Backstop Dispute Fuels Fresh Pound South African Rand (GBP/ZAR) Exchange Rate Losses

Johnson’s Opposition to Irish Backstop Drives Pound Sterling South African Rand (GBP/ZAR) Exchange Rate Weakness

A fresh wave of Brexit anxiety dragged the Pound Sterling to South African Rand (GBP/ZAR) exchange rate lower as Boris Johnson continued to criticise the Irish backstop.

After Johnson issued a four-page missive laying into the backstop and insisting on its removal from the withdrawal agreement the mood towards Pound Sterling (GBP) soured.

As EU officials remain committed to avoiding a hard Irish border this move was seen as a provocation intended to stifle any future negotiations, raising the risk of a no-deal Brexit scenario.

This naturally weighed on GBP exchange rates, with markets also losing confidence in MPs’ ability to force a shift towards a more moderate approach to Brexit.

Global Growth Worries Hamper South African Rand Demand

The persistent sense of global trade anxiety continued to limit the potential for South African Rand (ZAR) gains, however, as demand for risk-sensitive assets remained muted.

With tensions between the US and China looking set to linger for some time to come ZAR exchange rates struggled to find any particular traction.

As worries over the health of the South African economy remain investors saw limited incentive to favour the Rand over its less risky rivals.

Even so, with markets anticipating a set of dovish Federal Reserve meeting minutes a weakening US Dollar (USD) helped to shore up ZAR exchange rates for the time being.

Pound Sterling Looks for Support on Improved Government Borrowing Figures

July’s UK public sector net borrowing figure could offer the GBP/ZAR exchange rate a rallying point tomorrow, though.

As forecasts point towards a smaller increase in government debt at the start of the third quarter the appeal of the Pound looks set to improve.

Evidence of greater fiscal resilience may help GBP exchange rates to recover some of their recent losses, even in the face on ongoing political uncertainty.

On the other hand, a widened borrowing deficit could drive the Pound into a fresh downtrend as the spectre of a no-deal Brexit continues to cast its shadow over the economic outlook.

As long as market anxiety over Brexit continues to escalate the potential for a GBP exchange rate recovery is likely to diminish.

Rising South African Inflation Forecast to Offer ZAR Exchange Rate Boost

Further volatility may be in store for the GBP/ZAR exchange rate on the back of the latest South African consumer price index report.

With inflation expected to pick up from 4.4% to 4.5% on the year the odds of the South African Reserve Bank (SARB) adopting a dovish outlook could increase.

Although a reading of 4.5% would remain within the SARB’s target inflation range the general shift in global monetary policy could still fuel speculation of possible future action.

The possibility of additional monetary stimulus may encourage the South African Rand to strengthen, with looser monetary policy having the potential to boost economic activity.

However, as long as worries over the health of the South African economy and its increasing debt levels linger this should limit the potential for GBP/ZAR exchange rate losses.

Louisa Heath

Contact Louisa Heath