- GBP/ZAR forecast to decline from 'exhaustion bar' highs.
- Rand still plauged by both global and domestic headwinds.
- GBP eyes Bank of England, ZAR the latest inflation data.
Image © Comugnero Silvana, Adobe Stock
The Pound-to-Rand rate rose strongly last week after the Turkish currency crisis drove an investor exodus from other vulnerable emerging market currencies including the South African (SA) Rand, although the exchange rate is expected to decline over coming days.
Daily price charts are showing two exhaustion bars that suggest the uptrend is out of gas and the exchange rate now vulnerable to a correction lower. The first exhaustion bar formed on 13 August, one of the days when the Lira collapsed.
Above: Pound-to-Rand rate shown at daily intervals.
The first exhaustion bar has all the characteristics of an exhaustion bar high: it is tall, the shape of a shooting star and much of it is perturbing out the top of the upper Bollinger Band.
Normally the market would immediately retreat after one these bars closes. But in this case, the pair formed a second exhaustion bar on the 17th August, from which it has now begun to fall. It is highly unlikely the highs of either the 13th or 17th of August will be revisited by the market any time soon. .
GBP/ZAR will now probably fall all the way back down into the centre of the Bollinger Band and to the cluster of 50 and 20-day moving averages (MAs) situated between 17.75 and 17.80. A break below the 18.41 lows would provide initial confirmation that a downward leg is beginning.
The Pound: What to Watch
The main event for the Pound in the week ahead will be testimony from Bank of England (BOE) governor Mark Carney the Parliamentary Treasury Select Committee, on Wednesday, August 22, covering the inflation and economic outlook.
Although the BOE raised interest rates at the start of August, the chances of a further hike in the short term are generally viewed as low mainly given the increasing uncertainty around Brexit. Carney recently said the chances of a 'no-deal' Brexit were "uncomfortably high" and that this presents a risk to the economy.
The Pound is highly correlated with interest rates because of their influence over foreign capital inflows. Higher rates tend to attract greater inflows of capital, which raises demand for Sterling. Therefore, traders will be analysing Carney's statements for clues on when rates might change again, even if more clarity is unlikely.
The other major release for the Pound is the Confederation of British Industry (CBI) Industrial Trends report for August, with overall activity balance forecast to decline from 11.0 to 10.0 when the report is released on Tuesday, August 21 at 11.00 B.S.T.
CBI surveys are often closely followed by the market due to their timeliness and can provide early insight into activity within the economy.
The South African Rand: What to Watch
The resumption of trade-war-related talks between the US and China this week has helped take pressure off the Rand and if this trend towards more cordial relations continues the exchange rate will decline in sympathy with the bearish technicals outlined above.
The Rand is also extremely sensitive to movements in the US Dollar, with which it shares a negative correlation. So any downward correction in the Dollar this week stemming from the easing of geopolitical tensions would provide the South African currency with an added tailwind.
Worsening economic data, however, may be a 'fly in the ointment' for the Rand as the economy is now teetering on the edge of a "technical recession," according to Kim Silberman, an analyst at Rand Merchant Bank, who says recent data has left the economy in danger of contracting for a second consecutive quarter for the three months to the end of June.
Silberman says wholesale sales activity, which accounts for around 5% of GDP, declined 0.3% in the second quarter and motor vehicle sales fell 1.4%. Retail sales (6.5% of GDP) contracted by 0.4%.
"This negative contribution should be countered by positive ones from mining, finance and government such that SA narrowly avoids a technical recession. RMB expects GDP growth in the region of 0.6% q/q in 2Q18," Silberman writes, in a recent briefing for clients.
The main release for the Rand in the week ahead is inflation data, which is forecast to show a 0.7% rise in consumer prices during July and a 0.5% increase when food and energy are removed from the goods basket.
Inflation is significant for the Rand because it is consumer price pressures the central bank is trying to manipulate when it changes interest rates. The higher inflation rises, the more likely the South African Reserve Bank (SARB) will be to raise its interest rate in order to counteract it.
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