Pound vs. South African Rand Caught in Tight Range: Week Ahead Forecast

South african rand vs. the Pound

Image © Comugnero Silvana, Adobe Stock

- Sideways action likely bar major upset

- Brexit headlines dominate Sterling

- The ZAR could take its cue from the U.S. Dollar

The Pound-to-Rand rate has been consolidating in an unusually tight range for the pair over recent weeks. The range is loosely identified by an upper limit towards 1.19 and a floor at 18.50.  

Improving emerging market sentiment has supported the Rand but the Pound has also gained support from increased hopes of a Brexit deal.

A primary risk factor for the pair in the week ahead may be the effect of the U.S. mid-terms on the U.S. Dollar which is negatively correlated to the Rand.

"Opinion polls show a strong chance that the Democratic Party could win control of the House of Representatives; this could halt President Trump’s plans to push through with implementing tax cuts. If so, the stock market might take a knock, and the Dollar too," says Zaakirah Ismail, FIC Strategist at Standard Bank.

A softer Dollar would likely see demand for emerging market assets receive a boost, in turn bidding ZAR higher.

"Ultimately, we still see the Rand compressing its overshoot in the medium term, premised on both credit and fiscal risks easing," says Ismail.

The key for the GBP/ZAR pair remains the extent to which political and financial uncertainty can be lifted and foreign investors persuaded to invest in the country.

From a technical standpoint, the charts are not providing many clues.

GBP vs. ZAR daily graph

As we have already said the daily chart is showing the pair in a narrow sideways consolidation range between 19.00 and 18.25.

The range is capped by the 50-day Moving Average at the highs and the 200-week Moving Average at the lows.

Both these major Moving Averages are likely to present a tough obstacle to the exchange rate, increasing the likelihood it will remain penned in.

GBP to ZAR weekly graph

Only a clear break below 18.00 or above 19.35 would provide confirmation of a change of trend from a technical standpoint, otherwise, the charts are neutral.

On the hard data-front the week ahead's main releases are mining and manufacturing production in September, both out on Thursday, November 8.

Mining production is forecast to rise 0.3% after falling -0.9% in August and been "relatively more disappointing" over the summer, according to Peter Worthington, an economist at ABSA bank in Johannesburg.

Manufacturing is forecast to fall -0.1% from a 0.1% rise in the previous month of August, yet overall it is "set for a strong rebound in Q3, given the better-than-expected July and August prints and the weak base from Q2," says Worthington.

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