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South African Rand at Risk of Pound's Short-Covering Rally Extending Further

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© DragonImages, Adobe Stock

Sterling finds itself in the midst of a strong rebound against the Rand at the start of the new trading week.

The unexpected recovery in the Pound-to-Rand exchange rate last week was probably an example of what market professionals call a 'short-covering rally'.

This is when a sudden, strong, bounce has sellers worried the market will go higher, and they start 'covering their shorts' (closing their bearish bets) which actually adds more fuel to the recovery.

This particular recovery has come as a surprise to us as we expected the market to continue falling to an eventual downside target of about 15.50, but it never got there and instead stalled at the 16.07 lows and reversed.

The recovery probably will not last and we expect the downtrend to resume fairly soon, but we would want to see a break below the 16.07 lows for confirmation first.

Such a breakdown would probably reach the former downside target of 15.50, eventually, which was calculated by taking the distance from the November highs at 19.00 to the December lows at 16.50 (see chart above, wave A-B) and extrapolating it by the golden ratio lower in wave C-D.

The golden ratio or 0.618 is a mathematical constant that explains proportions in nature and financial markets.

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Data and Events to Watch for the South African Rand

It is a busy week for South African data, starting with Q4 GDP out on Tuesday at 10.00 GMT when it is expected to show a 1.4% rise compared to a year ago; in the previous quarter, it showed a 0.8% increase from the previous year.

On a quarterly basis, it is forecast to rise 1.8% compared to the Q3 when GDP rose by 2.0% compared to Q2.

Higher-than-expected growth would be positive for the currency as it would reduce the chances of a credit rating downgrade which is the next major event on the economic calendar later in March.

Wednesday at 9.30 also sees the release of the SAACI Business Confidence gauge in February as well as Foreign Exchange Reserves in the same month.


Data and Events to Watch for the Pound

UK Services PMI data, released this morning, came out at a higher-than-expected 54.5 from 53.0 previously, and this helped Sterling rise across the board as it indicated the UK economy's largest sector was in fine health.

As far as major economic events for the Pound in the week ahead of principle interest is a speech from the Chancellor Philip Hammond on Brexit, which focuses on a bespoke deal for the UK's dominant services sector.

The UK has a services sector trade surplus with Europe so this could be important for the Pound, however, whether Hammond's proposals are likely to be accepted by Brussels is a different matter.

Other key releases include the trade balance in January, which is forecast to show the deficit narrowing to -12.2bn from -13.6bn previously when it is released at 09.30 GMT on Friday.

Industrial production is out at the same time and is forecast to show a 1.1% rise month-on-month in January.

Manufacturing production, also out at 09.30 on Friday, is forecast to rise by 0.2% in January compared to the previous month.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.