Major South African Fiscal Stimulus Package Dents Pound South African Rand (GBP/ZAR) Exchange Rate
In the wake of South African president Cyril Ramaphosa’s unveiling of a major fiscal stimulus package the Pound Sterling to South African Rand (GBP/ZAR) exchange rate came under renewed pressure.
Worries over the outlook of the South African economy eased thanks to the prospect of fiscal spending amounting to a tenth of the country’s output, something which could cushion the impact of the Covid-19 crisis.
With South Africa also making its first request for a loan from the International Monetary Fund (IMF) markets found cause for confidence, betting that the economy could still weather the current storm in spite of its existing weakness.
Even with the country trailing behind many others in its fiscal response to the pandemic this move helped the South African Rand (ZAR) to push higher across the board today.
GBP Exchange Rates Benefit as UK Inflation Rate Softens
Support for Pound Sterling (GBP) improved, meanwhile, thanks to a softening of the headline UK consumer price index.
As the inflation rate eased from 1.7% to 1.5% on the year in March this suggested that households may come under less pressure at the end of the first quarter.
Even with inflation falling away from the Bank of England’s (BoE) 2% target GBP exchange rates found renewed support this morning, given that the data is unlikely to alter the current outlook of policymakers.
However, as BoE governor Andrew Bailey warned against easing the current Covid-19 lockdown too soon confidence in the outlook of the UK economy remained relatively muted.
Underwhelming UK Services PMI Forecast to Drag Pound Lower
The GBP/ZAR exchange rate could shed further ground tomorrow if April’s UK manufacturing and services PMIs weaken as forecast.
Markets expect to see a sharp fall from the services PMI, with the index looking set to slump from 34.5 to 29.0 on the month.
A deeper slide into contraction territory for the service sector would not bode well for the wider economic outlook, as the sector remains the UK’s primary growth engine.
Even if the manufacturing sector proves more resilient in nature this would not be enough to outweigh a disappointing services PMI performance, leaving the Pound exposed to selling pressure.
Market Jitters and Risk Aversion Set to Weigh on South African Rand
Even so, the South African Rand may struggle to hold onto its bullish footing for long in the days ahead as the impact of the fiscal stimulus announcement fades.
A lack of fresh South African data may leave investors with little reason to support ZAR exchange rates in the near term.
Developments in market sentiment could also put pressure on the Rand once again, especially as the oil market continues to suffer under the weight of a growing oversupply glut.
As long as risk aversion picks back up this could drive the Rand lower across the board, thanks to the South African economy’s exposure to any global slowdown.