Pound to South African Rand Falling Towards Downside Forecast of 18.00

The South African rand continues to strengthen against the weaker pound, after inflation data showed a slight rise in price growth in June. This week the South African Reserve Bank is also set to meet and decide its interest rate.

The GBP/ZAR pair has steadily fallen down to tis current level of 18.84 after UK Retail Sales data failed to meet expectations and increased concerns about the country falling into a possible recession post-Brexit.

Inflation data on Wednesday, which showed a rise in June inflation of 6.3% from 6.1% previously mildly lifted the rand until analysts realised the quarterly inflation data surprised to the downside.

The overall subdued quarterly inflation reading, according to Rand Merchant Bank's John Cairns, is now expected to make it highly unlikely that the South African Reserve Bank (SARB) will raise interest rates at their meeting on Thursday, as had been feared.

"Just like us, all the other 23 economists surveyed by Bloomberg expect the SARB to keep the repo rate unchanged at 7.0%. This expectation is not surprising, especially given that the decision comes after Stats SA released CPI inflation figures yesterday, which showed that inflation marginally accelerated to 6.3% in June." Said Cairns.

Technical outlook

The chart of the GBP/ZAR pair remains bearish overall, although there are also signs a possible reversal could be on the horizon too.

The pair may have formed a bottom at the recent July lows, however, it is still too early to say.

The move down which began at the 23.00 May highs and probably ended at the 18.65 July lows, is known as a 'measured move'.

Measured moves are basically three-wave zig-zags where the first leg is roughly equal in length to the third leg.

This one looks to have completed – the question now is, where is the exchange rate likely to go next?

Normally markets reverse at the end of measured moves, but not always.

In this case, given the down-trend is still dominant, and in the absence of any stronger evidence of reversal, the down-trend remains dominant and expected to extend, despite the completion of the measured move.

A break, therefore below the current 18.65 lows would provide confirmation of more downside, with the next target at 18.00.

South African Reserve Bank (SARB) Meeting on Thursday

The main event in the week ahead for the rand is the meeting of the SARB on Thursday.

According to most analysts the central bank is unlikely to change interest rates which currently sit at 7.0%.

Previously the SARB had been in a tightening cycle, raising rates from 5.8 to 7.0% over the last 12 months.

Important CPI data is due to be released on Wednesday July 20; a rise in inflation would put more pressure on the SARB to raise rates.

Rand Merchant Bank’s John Cairns sees inflation still rising but does not expect the SARB to alter rates.

“We expect CPI to increase slightly to 6.2% from 6.1% recorded in May, reflecting increases in transport, housing and household contents. Inflationary pressures remain on the upside. We expect the SARB to remain concerned with the risks to the inflation outlook but to keep the repo rate unchanged at 7.0% on Thursday. The recovery in the rand over the past month will make it difficult for the SARB to justify a hike. However, wage negotiations and inflation expectations will feature as concerns to the inflation outlook.”

Latest Pound / SA Rand Exchange Rates

	Live: 22.6363▼ -0.07% 12 Month Best: 25.4721
*Your Bank's Retail Rate	21.8667 - 21.9572
**Independent Specialist	22.3194 - 22.41 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Cairns describes how union wage negotiations are pushing up wages and inflation expectations:

“The National Union of Mineworkers (NUM) will today refer its pay increase dispute with Eskom to the CCMA after it declared a wage dispute last Friday. NUM is demanding a one-year wage agreement increase of 13% for the lowest paid workers and 12% for the highest paid workers and a housing allowance of R5000. Eskom has offered a 7% increase.”

The rand’s strong appreciation during 2016 may make the SARB think twice about raising rates any higher, however, as that could increase its value even more, impacting negatively on exports.

Likewise higher rates are likely to stifle growth by increasing borrowing costs, and this could lead to a slowdown and increase the threat of a downgrade of South African debt, which sits hanging on, only one notch above junk status.

UK data – highlight lies at end of week with July PMIs

For sterling there are a welter of data releases in the week ahead, but the most relevant could be the July Manufacturing, Services and Construction PMI’s at the end of the week, since they will comprise the first major piece of data gauging how well the economy is weathering Brexit.

June CPI on Tuesday, will nevertheless be significant and is likely to show a 0.4% rise versus 0.3% previously.

Then on Wednesday we have employment data and in Friday Retail Sales in June, which is forecast to fall by -0.6% mom from 0.9% previously.