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South African politics is likely to be the main driver of GBP/ZAR with an appreciation of the Rand likely if president Zuma is ousted from power.
Before looking at the political issues affecting the Rand we look at the charts, as a study of price action can often reveal important clues as to the future direction of the exchange rate.
The Pound-to-South African Rand has been trading in a sideways range between 16.42 and 17.15 since selling-off down to a minor bottom at 16.4265.
The pair had been rising in a channel but now it has broken down out of the channel and is in a short-term downtrend.
It may have formed a bearish pattern called a bear flag, which would forecast signifcantly more downside on the horizon.
A break below the bottom of the flag square and the 16.4265 low would provide confirmation of further downside, to a target at 15.50 and the March lows.
Normally bear flags will trade down as far as the height of the pole extrapolated lower from the flag square, however, that would make the target 14.45.
Another method of calculating how much lower the pair will go could also be to use the height of the rising channel and extrapolate that lower from the break point and that gives the more conservative target of 15.50 which also happens to be the same level of the March lows.
We have opted for the more conservative target given it corresponds both with the March lows and the calculation using the channel.
Data and Events for the South African Rand
Politics may be the main factor moving the Rand in the coming week with a high probability of the currency strengthening if president Zuma is ousted from office.
Members of the rulling party, the ANC's national executive commitee, are meeting today (Monday February 12) to decide whether to force president President Jacob Zuma out of office early and make way for a new president in the form of the newly elected Cyril Ramaphosa.
"Supporters and critics of President Jacob Zuma are expected to face off on Monday in another special national executive committee meeting as the party decides on his fate," sayed EWN reporter Mia Lindeque.
If Zuma leaves it will have a positive effect on the Rand.
"While it is highly anticipated, a formal resignation by President Zuma would still send the rand much stronger," said Rand Merchant Bank (RMB) analyst John Cairns.
The probability of Zuma leaving is now seen as quite high.
The first sign of his probable impending exit was a postponement of his 'State of the Nation' address with no alternative date set.
Then the news of the ANC executive committee meeting today and press conference afterward at 14.00 is "proof that the end is nigh," according to TreasuryONE senior currency dealer Andre Botha.
"A lot of the Zuma resignation/recall has been priced in, but we expect a knee-jerk lower," adds Botha.
This would suggest that the bearish technicals are supported by bearish fundamentals as well, increasing the probability they are right.
Even if Zuma does not fall today the South African opposition parties have tabled a motion for a vote of no confidence in Zuma on Tuesday (tomorrow) which will also threaten his leadership.
The recent rise in US inflation expectations which triggered a sell-off in US and global stock markets has been negative for the Rand and further weaknesses could offset any rise in the Rand, warns TreasuryONE's Botha.
Wednesday could be a key day for the Rand as US inflation data is due for release and any rise is likely to hurt the Rand as it will probably extend the stock sell-off and the general climate of risk aversion which is harmful to emerging markets.
"The knee-jerk from any Zuma news will only be fleeting should the international equity sell-off continue. On Wednesday, we have the US inflation number that is set to be released. Any improvement from the 1.9% expected will inevitably start to have an effect on the US dollar and EM currencies, with the dollar looking stronger on the back of more rate increases, by the Fed, that the higher inflation number will justify," says Botha.
Other key data in the week ahead for South African Rand is Unemployment data for Q4 out at 9.30 GMT on Tuesday, which is expected to show the unemployment rate to remain at 27.7% and the number of unemployed to rise to 6.21m from 6.20.
Retail Sales data is out at 9.30 on Wednesday, February 14, and is expected to show a 4.0% rise in December compared to a year ago (year-onm-year (yoy)), and compared to 8.2% yoy in November.
On Wednesday, South African inflation data for January is due for release at 9.30 and is forecast to show a 0.5% rise compared to the previous month.
The annual inflation rate was 4.7% in December and core inflation was 4.2%.
Data and Events to Watch for the Pound
From a data perspective inflation and retail sales releases dominate the outlook for the Pound in the week ahead.
Inflation is a driver of interest rates which in turn influence the Pound, so a rise in inflation will lead to a stronger Pound. On Thursday, February 8 the Pound rallied as the Bank of England communicated that interest rates might have to rise faster than previously anticipated in coming months in order to combat persistently high rates of inflation.
The Bank and markets alike will therefore be watching the latest installment in UK inflation data to see where the trends lie, the release is due out on Tuesday, February 13, at 9.30.
Forecasters expect a 2.9% rise compared to a year earlier (yoy); in the previous month of December, the inflation rate was a higher-than-expected 3.0% (yoy).
On a monthly basis, inflation is expected to decline by -0.6% in January.
Core inflation, which strips out volatile food and fuel components, is forecast to rise by 2.6% compared to 2.5% previously; often it is this number that moves markets.
On all accounts, should the data come in below expectation we would expect Sterling to decline, and should data beat expectations we would expect Sterling to rise.
The other main release is retail sales, which is scheduled for release on Friday, February 16, at 9.30.
A higher-than-expected result could reaffirm the UK economy's resilience and support Sterling.
Retail Sales is forecast to rise by 2.6% in January compared to a year ago when it only gained by 1.4%. Month-on-month it is forecast to increase by 0.5% from -1.5% previously.
Kathy Lien, managing director of BK Asset Management, forecasts lower-than-expected inflation and retail sales data, which could weigh on the Pound.
"Looking ahead, the UK's inflation and retail sales reports are scheduled for release and if the data surprises to the downside like we expect, it may be difficult for GBP to rally," says Lien.
Data aside, the other major factor for Sterling in the coming week is likely to be how Brexit negotiations evolve.
The Pound fell last week following the revelation that the EU was reconsidering whether to allow the UK a two-year transition phase deal after the official Brexit deadline in 2019, in order to help negotiate a new trade relationship.
After a breakdown in talks over the nature of the UK's rights during the transition period itself, Chief EU Brexit negotiator Michel Barnier said that if the disagreements continued it was "not a given" the UK would even get a transition period at all.
This took the wind out of Sterling's sails after it rose strongly following the Bank of England's positive assessment of the economy on Thursday.
"Instead of making progress this week, Brexit negotiations have taken a step back and to the dismay of sterling bulls, this overshadowed the BoE's hawkishness," concluded Lien.
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