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Pound vs. South African Rand Rate in the Week Ahead: Birth of New Short-Term Uptrend

Pound to Rand exchange rate

Image © Natanael Ginting, Adobe Stock

- Break above key highs indicative of new uptrend

- Resistance zone in 17.80-18.00 region a hurdle

- Broader Rand family subject to moves in USD this week

The Pound-to-Rand exchange rate is trading at 17.70 at the start of the new week over a percentage point higher than the week before and from a technical perspective, the short-term trend may be changing to 'up' after the rise this morning broke to new highs, above the previous Feb 7 highs.

GBP to ZAR 4 hour chart

This now means GBP/ZAR has established two sets of higher highs (HH) and higher lows (HL) on the 4-hour chart (above), which is one of the first signs the short-term trend may be changing.

There is now a strong chance GBP/ZAR will rise up to the next level of resistance at around 17.80, at the trendline of the move down from the September 2018 highs.

Above that, however, the exchange rate may struggle to break above the trendline, drawn on the daily chart below, and move higher since just above are several other obstacles to further upside such as the 50 and 200-day moving averages (MA).

GBP to ZAR daily

The whole area above the trendline encompassing the two major MAs could be classed as a resistance zone, and this is likely to present a further obstacle to bullish progress. It would require a clear break above the January highs to indicate this resistance zone had been cleared with a continuation thereafter up to the next target at 18.60000 and the December 2018 highs.

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The South African Rand: What to Watch this Week

The main release for the South African Rand in the week ahead is unemployment data for Q4 out on Tuesday at 9.30 GMT. Unemployment currently stands at 27.5%.

After that, there is manufacturing production, retail sales and mining data.

“Stats SA will also release manufacturing production for December on Tuesday. Manufacturing production growth moderated in November to 1.6% y/y, from a downwardly revised 2.8% y/y (previously 3.0% y/y) in October,” says Shireen Darmalingam, an economist at Standard Bank.

“December retail sales data will follow on Wednesday and mining production on Thursday. Mining production had disappointed in November, contracting by 5.6% y/y, from a downwardly revised increase of 0.2% y/y in October. Gold production fell for a 14th month in November,” she adds.

The Rand is also highly sensitive to the U.S. Dollar. It is negatively correlated to the Dollar which means when the Dollar rises the Rand usually weakens and vice versa for when the Dollar falls. This is due to the high amount of Dollar-denominated debt in South Africa which increases in cost the more the U.S. Dollar appreciates.

A key release for the Dollar this week is probably inflation data out on Wednesday. This is especially true given the Federal Reserve’s communication to markets in January that it would shift to a more data-driven stance when considering future interest rate moves.

A higher-than-expected inflation result would probably be positive for the U.S. Dollar and vice versa for a lower result as it suggests the Fed might have reason to deliver further interest rate rises in 2019.

Current expectations are for CPI to show a 0.1% rise in January compared to December. This is higher than the -0.1% result in the previous month.

On a yearly basis, inflation is expected to have risen by 1.5% in January compared to a year ago, compared to 1.9% in December also on a year-on-year (yoy) basis.

Higher inflation puts pressure on the Fed to raise interest rates which in turn attracts higher inflows of foreign capital drawn by the promise of higher returns, and this increases demand for the host currency.

“On Wednesday of next week, financial markets will get a look at CPI numbers for January. For a “patient” and “data-dependent” Fed, these inflation numbers are key,” says a note from the economics team at Wells Fargo. “In December, there was evidence that a number of factors have been driving inflation higher. That was easy to miss because the headline measure was pulled down by falling energy costs and lower commodity prices. Ex-energy, CPI rose 0.2% month-over-month in December and is up 2.1% over the past year.”

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