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Pound Decline vs. South African Rand Could Resume this Week

ZAR

Image © Pound Sterling Live

- Rand rose in previous week but trend bearish

- Potential for GBP/ZAR decline to resume

- Brexit news to dominate Sterling; inflation the Rand

The Pound-to-South African Rand rate starts the week trading at 17.82 after gaining 0.3% in the week before with the recovery largely being attributed to the broader rise in the Pound after the perceived chance of a 'no deal' Brexit lessened.

A weaker Rand, however, also played a part; the South African unit fell due to its sensitivity to the U.S. Dollar which rebounded on the back of a recovery in the stock market - unfortunately, what is good for the Dollar is bad for the Rand which depreciated on the news.

Despite the pair’s gains, the technical outlook is actually on balance bearish - the pair is in a longer-term downtrend which is expected to continue.

GBP to ZAR daily

Looked at from the perspective of the price chart, last week’s 0.3% move higher looks like nothing more than a correction in a downtrend which is likely to resume.

A break below the 17.49 lows would provide confirmation for a continuation of the downtrend down to a probable target down at the 17.00 support lows, based on the trendline drawn from the March 2017 lows.

GBP to ZAR daily

The pair is also trading below the 200 and 50-day moving averages (MA) which is a further bearish sign, as is the recent crossing over of the 50 below the 200-day.

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The South African Rand: What to Watch this Week

The main release for the SA Rand in the week ahead is inflation data out at 8.00 GMT on Wednesday, January 23.

Headline inflation data is forecast to show a slowdown in December, probably due to lower oil prices; it is expected to fall -0.2% compared to the month before. Core CPI, on the other hand (which does not include oil and food), is forecast to show a sharper 0.4% rise compared to the 0.2% previously.

A higher-than-expected inflation result would probably lead a rise in the SA Rand as it would increase the chances of the South African Reserve Bank (SARB) increasing interest rates.

Higher interest rates appreciate the local currency by attracting and keeping greater inflows of foreign capital drawn by the promise of higher returns.

The Rand is highly sensitive to the U.S. Dollar so if the Dollar undergoes sharp moves in the week ahead so will the Rand.

The main data releases for the U.S. Dollar are Manufacturing and Services PMIs for January, which are out on Thursday, at 14.45 GMT.

PMIs are survey-based activity indicators which often provide a good leading indicator of economic growth.

Manufacturing is forecast to decline slightly to 53.5 in January from 53.8 in the previous month and Services to 54.2 from 54.4.

If they come out better-than-expected, the Dollar could gain a boost (and the Rand take a hit) - and vice versa if worse - although the surprise would be more if they were better.

The trajectory of the U.S. stock market may also come into focus next week after it recovered up to some key resistance levels.

If stocks start to fall again, the Dollar will remain vulnerable because of what it says about the economy, if the recovery persists, however, the Dollar could gain a boost (negative for the Rand) from increased confidence in the state of the U.S. economy.

 

The Pound: What to Watch

The main factor influencing the Pound in the week ahead will be the next instalment of the Brexit saga. On Monday a motion will be put to Parliament which, if voted through, would ‘express the will of Parliament against 'no deal’.

"MPs will tomorrow unveil their plan to hijack the agenda of the Commons to suspend article 50, the mechanism by which the UK is leaving the EU," reports The Sunday Times.

Any motions aimed at preventing a no-deal Brexit are tipped to have a good chance of being voted through since it is the only option which appears to be supported by a majority of MP’s. If it is passed, it will further reduce the probability of a disorderly hard-Brexit and support the Pound further.

The Sunday Times meanwhile reports the Prime Minister Theresa May will meanwhile likely disclose her 'plan B' option aimed at salvaging her Brexit deal.

"She wants to offer a bilateral treaty to Ireland that would remove the hated “backstop” from the EU withdrawal treaty and prevent a hard border by other means," says Tim Shipman, Political Editor at The Sunday Times.

On the 'hard data' front, the main release is labour market data on Tuesday at 9.30 GMT. The consensus forecast is for 20k jobs to be added in December, for the unemployment rate to remain at 4.1% in November, and for average earnings (including bonuses) to rise 3.3% compared to a year ago, also in November.

A higher-than-expected result would support Sterling. UK data has been mixed recently. Last Friday the Pound floundered after UK retail sales showed an unexpected decline of -0.9% in December, which was below the -0.8% expected, and there is a risk that more data misses will build a picture if decline which further weighs on Sterling.

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