The Pound is forecast to maintain the upper hand against South Africa's Rand over the near-term.
The Pound to Rand exchange rate has faded from the 18.27 high achieved on November 11 amidst a broad-based ZAR recovery move.
The Rand often strengthens in line with expectations of global growth and US President-Elect Trump’s generous infrastructure spending plans have inspired global reflationary hopes which have supported the Rand via expectations for increased demand for commodities.
South Africa is a key commodity producer and this dynamic is therefore positive.
Nevertheless, Trump has still to take office and have his manifesto pledges tested by reality.
There have already been signs that the Trump-trade is slowing as the market will have to reach a saturation point on the matter and any signs of capitulation on spending pledges by Trump could punish commodity prices, and thus the Rand, severely.
This view supports our technical studies of the Rand's prospects against the Pound.
The GBP/ZAR pair has broken above a major trendline in a bullish reversal sign.
Since then it has pulled back down to the trendline, in a possible ‘throwback move’ but it is still likely to recover and push higher again eventually:
A break above the December highs at 17.9000 would probably lead to a continuation higher to a target at 18.50.
The 18.50 could be a good target for those with large ZAR purchases to set limit orders and take advantage of any spikes.
The main data release for the Rand this week comes is on Wednesday, December 14 at 03.00 (GMT) when CPI is published and expected to show a 0.3% rise month-on-month in November.
Core CPI, released at the same time, is expected to rise by 0.2% month-on-month. We doubt the domestic data will trouble any set trends and are therefore more interested in external drivers.
With this in mind, the outcome of the Federal Reserve's FOMC meeting on interest rates this Wednesday may also impact on the Rand.
Suggestion that the Fed will look to push rates higher in 2017 will aid the US Dollar and could weigh on commodities and the ZAR.
However, if the feedback is cautious and suggestive of lower-rates-for-longer then the Rand could find support.
The Pound's Outlook Hinges on the Bank of England Meeting and Inflation Data
The Bank of England’s rate meeting on Thursday, December 15 and the mid-week Federal Reserve meeting, are the major events on the economic calendar in the week ahead.
There is not expected to be any changes in policy from Threadneedle Street but there is always a risk of more easing given the continued uncertainty over Brexit.
The minutes which will follow the meeting are likely to be the object of scrutiny as markets try to read hints of a change in stance, which is currently very accommodative.
UK inflation will be brought under the spotlight on Tuesday, December 13 when November CPI is released at 09.30.
The annualised figure is forecast to read at 1.1%, up from the previous month's 0.9%.
A beat on this figure would prove beneficial to the Pound in that it would imply the Bank of England may have to raise interest rates at some point in the future in an attempt to keep inflation settled.
However, if the figure underwhelms then Sterling could struggle.
On Wednesday, December 14 at 09.30 the ONS release unemployment data, which is forecast to show a 4.8% unemployment rate (Oct), a 5k rise in the Claimant Count (Nov) and Average Earnings Including Bonuses (Oct) rising by 2.3%.
On Thursday, December 14 at 09.30 Retail Sales in November is released and expected to come out at 0.2% month-on-month.
If these data remain robust then Sterling should be able to enjoy the fundamental support required to keep its recent recovery move in place.