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Pound / South African Rand Forecast: Probable Rebound on the Cards

South African Rand

Image © Pound Sterling Live

- GBP/ZAR to bounce off range floor and extend sideways

- More range trading foreseen longer-term

- Ramaphosa’s speech on Thursday and FOMC events for ZAR

The Pound-to-Rand exchange rate is trading at around 18.28 as we reach the middle of the week, already 1.85% lower since Monday's open, but studies of the charts suggest a rebound is on the cards as the embedded range continues to unfold.

The pair recently fell to the floor of a long-term range at 18.11 and bounced, as shown on the 4hr chart above. The pair will probably continue to recover, rising back up within the range over the short-term, towards initial targets at 1.1850-60 and then 19.00 eventually.

GBP to ZAR

The RSI momentum indicator (circled) in the bottom panel has fallen into the oversold zone below 30 which indicates a heightened risk of the bonce or sideways move developing in the asset price, further supporting the bullish short-term view.

The RSI appears to have turned higher recently and is rising. If it successfully climbs out of the oversold zone it will provide a clear bullish buy signal.

The 4-hour chart is used to analyse the short-term trend, which means the next 5 days - or week - of trading activity.

The daily chart meanwhile merely reaffirms the sideways nature of the trend. It shows how the pair has repeatedly fallen and risen in three-wave (abc) zig-zags of price action ever since it started trending sideways in March 2019.

GBP to ZAR daily

The RSI appears to have hit a ‘floor’ of support at the same time as the price and also looks poised to rebound higher. Rising RSI supports the idea of rising prices. Thus we see the pair continuing higher within the parameters of the range up to a target at 19.00 over the medium-term.

The daily chart is used to analyse the medium-term trend, which is the next 1-4 weeks price action.

The weekly chart above shows the sideways range within the context of broader market action. The pair is rising in a channel over the long-term and this actually gives the overarching trend a bullish bias.

GBP to ZAR weekly

In the absence of firmer bullish indicators, however, it is difficult to conclude with any degree of certainty how or when the pair will breakout from its current range, so over the longer-term we still see a probable continuation of the sideways trend.

The weekly chart is used to analyse the long-term forecasting horizon, defined as between 1-4 months into the future.

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The South African Rand: Short-Term Outlook Dominated by Ramaphosa Adress

The main event on the horizon for the Rand is the State of the Nation Address (SONA) by president Cyril Ramaphosa on Thursday, June 20, at 18.00 BST.

The SONA is key to the Rand because it will be seen as an important test of whether Ramaphosa will actually go ahead and implement the economic reforms he promised, despite resistance from members of his party.

If his speech suggests a radical reform agenda it will be bullish for the Rand; if not it could be bearish.

Analysts at ABSA are not particularly optimistic, seeing too much internal party and political constraint on the president for him to make the reforms seen as necessary to promote growth.

Further, the SONA is usually more a broad brush affair, seldom incorporating details of policy reform.

“We believe there is a risk that markets could be slightly disappointed with his address since few market participants appear to be expecting some bold new policy measures to address South Africa’s growth challenges. However, we believe he does not have much room to announce major changes in direction due to the lack of consensus within the ANC,” says Peter Worthington, an economist at ABSA.

Ramaphosa is seen as unlikely to announce market-friendly employment reforms for fear of upsetting the party-supporting unions.

Nor is he likely to announce reforms on the visa system and foreign worker status.

He is unlikely to reassert his commitment to the independence of the South African Reserve Bank (SARB) given recent fierce criticism from its opponents for its narrow remit.

On the subject of Eskom, the troubled national utility provider, he is likely to announce financial support on a drip feed basis.

“On the specific challenge of Eskom, we believe Ramaphosa could announce further financial support, probably on a pay-as-you-go basis, to ensure that Eskom is able to obtain going concern status from its auditors to table its annual results as scheduled before the end of June, though we doubt if the ‘full solution’ for Eskom is ready to be unveiled at this stage,” says Worthington.

Inflation data out on Wednesday showed subdued Core CPI, which came out at 0.0% when 0.1% had been forecast, on a month-on-month basis. This was negative for the Rand as it increases the probability that the SARB will cut interest rates in July - already considered a risk prior to the data but now more certain.

The Rand is also sensitive to fluctuations in the Dollar and global risk appetite. It is negatively correlated to the Dollar, such that when the Dollar weakens the Rand strengthens, it could therefore be influenced by the outcome of the meeting of the Federal Reserve (Fed) this evening at 19.00 BST.

Global risk appetite appears to be easing, meanwhile, on the back of conciliatory remarks from president Trump and the reopening of trade talks with China ahead of the G20 summit on the 28th and 29th June, and this could be a positive factor for the Rand.

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