GBP/ZAR Exchange Rate Remains Offered amid UK Growth Concerns
(Updated: 16:15, 21/5/23) The Pound South African Rand exchange rate remains on the back foot this afternoon.
The slump comes as GBP investors are unnerved by the prospect of the UK facing a self-inflicted recession in order to bring inflation under control.
In light of today’s UK inflation figures, analysts suggest the Bank of England will have no choice but to throttle wage growth by aggressively raising interest rates.
Karen Ward, chief market strategist EMEA at JP Morgan Asset Management, said:
‘The difficulty for the Bank of England – I mean, no-one envies them their job at the moment – is they have to therefore create a recession… It’s that weakness in activity which eventually gets rid of inflation.’
Meanwhile, the Rand is supported this afternoon by some cautious comments from Federal Reserve Jerome Powell. His comments have weakened the US Dollar (USD) and helped boost risk appetite.
Original article continues below:
Pound South African Rand Exchange Rate Volatile Following UK Inflation
The Pound South African Rand (GBP/ZAR) exchange rate is trading erratically this morning as investors react to the UK’s consumer price index.
At the time of writing the GBP/ZAR exchange rate is trading at around ZAR23.3664. Down almost 0.4% from this morning’s opening rate.
Pound (GBP) Fluctuates on Hotter-than-Expected UK Inflation
The Pound (GBP) has been met by volatility this morning, following the publication of the UK’s latest CPI figures.
Data published by the Office for National Statistics (ONS) showed headline inflation held at 8.7% in May. While this was a 13-month low, it missed forecasts it would drop to 8.4%. The accompanying core figures also showed underlying inflation unexpectedly jumped from 6.8% to a new 31-year high of 7.1%.
A knee-jerk reaction to the data briefly carried the Pound South African Rand exchange rate to a one-week high. The spike came amid rising bets for a 50bps rate hike from the Bank of England (BoE) tomorrow.
Economists at Capital Economics, commented:
‘While tomorrow’s MPC meeting is finely balanced, we think that a 50bps increase in Bank rate is now slightly more likely than a 25bps. The consensus remains for a smaller increase, but the markets are pricing in a 50% chance of larger move.’
However, the Pound quickly relinquished these gains before turning negative. The subsequent drop in the GBP/ZAR exchange rate proving to be particularly sharp.
The reversal of Sterling’s fortunes appeared linked to fears higher UK interest rates will stifle domestic growth. Analysts previously warned the UK could be tipped into a recession if rates reach 6%.
South African Rand (ZAR) Firms as Inflation Cools More than Forecast
The South African Rand (ZAR) is rallying this morning, following the release of South Africa’s own inflation figures.
In contrast to the UK, South African inflation cooled more than expected last month. Headline inflation decelerating from 6.8% to 6.3%, versus the drop to 6.5% forecast.
The slowdown relieves pressure on the South African Reserve Bank (SARB) to continue tightening its monetary policy.
This comes as a relief to ZAR investors as they hope this will help support domestic growth. South Africa’s economy has been battered by power cuts in recent months and this could help the country avoid a recession.
Pound South African Rand Exchange Rate Forecast: All Eyes on BoE
Looking ahead to the second half of the week, movement in the Pound South African Rand (GBP/ZAR) exchange rate will undoubtedly be dominated by BoE’s interest rate decision.
GBP investors may now be disappointed if the BoE opts to play it safe with a 25bps hike. While a 50bps increase could propel the Pound sharply higher.
Meanwhile, in the absence of any notable ZAR data releases. Movement in the Rand is likely to be tied to market risk dynamics through the remainder of the week.
Could a cautious market mood see investors steer clear of the emerging market currency?