Upbeat Budget Speech Pushes Pound South African Rand (GBP/ZAR) Exchange Rate Sharply Lower
Demand for the South African Rand (ZAR) picked up sharply in the wake of Finance Minister Tito Mboweni’s upbeat budget speech.
Investors bought into Mboweni’s confidence that South Africa will avoid a ratings downgrade from Moody’s in March, pushing the Pound Sterling to South African Rand (GBP/ZAR) exchange rate lower.
Although the South African economy still faces significant headwinds, particularly in the face of ongoing market anxiety over the spread of Covid-19, the Rand benefitted from the announced tax relief and curbs to the state wage bill.
As long as investors see reason to believe that Mboweni can deliver on the promises of his budget and shore up the struggling South African economy ZAR exchange rates are likely to remain on a stronger footing.
Disappointing UK Shop Price Index Drags on Pound Demand
Support for Pound Sterling (GBP), meanwhile, proved largely limited in the wake of a weaker-than-expected British Retail Consortium shop price index.
While forecasts had pointed towards another monthly decline in prices the -0.6% decline was sharper than anticipated, leaving GBP exchange rates exposed to fresh selling pressure.
This weaker showing added to bets that UK inflation is likely to fall back in the coming months, in spite of the six-month high hit in January.
If the inflation rate weakens once again this would give the Bank of England (BoE) greater leeway to cut interest rates in the near future, a prospect which could weigh heavily on the Pound.
Signs of Stronger SA Inflation May Add to South African Rand Gains
With markets expecting to see a solid uptick in January’s South African producer price index on the year the mood towards the Rand could improve further on Thursday.
While signs of rising inflation are unlikely to spur any particular action from the South African Reserve Bank (SARB) in the near future a stronger showing here could still boost ZAR exchange rates.
As long as inflation looks set to remain firmly within the SARB’s target range this should limit speculation over the SARB’s policy outlook, diminishing the potential for fresh Rand volatility.
However, increased market anxiety over the spread of Covid-19 and its impact on the global economic outlook could still put a dampener on the South African Rand this week.
UK-EU Trade Doubts to Limit Potential for GBP/ZAR Exchange Rate Recovery
Anxiety over the upcoming UK-EU trade negotiations may continue to cast a shadow over the GBP/ZAR exchange rate for the foreseeable future.
Until investors see reason to bet that the two sides could reach a fresh trade agreement before the end of the year this should limit the potential for Pound gains.
Friday’s GfK consumer confidence index may offer GBP exchange rates a boost, however, if sentiment shows signs of picking up as forecast.
While the index is expected to remain firmly in negative territory any improvement on the month would offer investors reason to bet on greater UK economic resilience.
As stronger levels of consumer spending and confidence have helped to shore up the economy in previous quarters a stronger showing here may give the GBP/ZAR exchange rate a solid rallying point.