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The Pound to South African rand exchange rate has receded from late July and early August’s highs but in most plausible scenarios it could be likely to steady around the nearby 23.11 level in the days ahead.

A stabilisation of global markets and improved risk appetite have helped the Rand back onto its front foot and weighed on GBP/ZAR of late, encouraged by robust investor appetite for the South African currency and increased market confidence that the Federal Reserve will cut interest rates meaningfully from September.

However, there is the prospect of a buoyant performance from Sterling that could limit any further decline in GBP/ZAR to 2.11 in the days ahead, given employment data suggesting a resilient UK labour market in June on Tuesday, and GDP data out on Thursday indicating a solid performance from the economy last quarter.

“The ZAR has proved the strongest major spot performer in the year to date,” said Jeremy Stretch, head of FX strategy at CIBC Capital Markets. “The net accumulation over the last six weeks is notable. Net holdings have accumulated by a factor of eight since mid-June, supporting ZAR outperformance.”

Above: Pound to Rand exchange rate shown at daily intervals with Fibonacci retracements of June rebound indicating possible areas of technical support.

Any stabilisation around 2.11 would be consistent with the author’s model-derived estimate of fair value for GBP/ZAR, which currently sits at 23.10, and would see the pair continue to be underpinned by the nearby 68.1% Fibonacci retracement of the June rebound, which sits at 23.08.

Another impediment to further losses in GBP/ZAR is the limited downside potential of USD/ZAR, which has fallen heavily in recent months but is fast approaching a major technical support level around 17.93, which is the 61.8% Fibonacci retracement of the extended uptrend from January 2023.

Both pairs share a relatively high positive correlation, suggesting GBP/ZAR would also gain support if the retracement at 17.93 level in USD/ZAR frustrates any further decline in the days or weeks ahead. USD/ZAR bottomed out at this level previously in the sell-off that followed the June general election.

However, the upside in GBP/ZAR and USD/ZAR could also be quite limited as the formation of a government of national unity has improved market sentiment toward the rand and South African economy, while the currency would also be likely to benefit from any further decline in the US dollar up ahead.

“South Africa’s economy looks to have recorded a pick-up in growth in Q2, but the recovery is operating at two speeds with retail sales and manufacturing on the up, while the mining sector remains a weak spot,” said David Omojomolo, an Africa economist at Capital Economics, in a Wednesday note to clients.

“Nonetheless, with easing electricity shortages and interest rate cuts on the way, the economy looks to be finally be turning a corner and we expect a further modest growth over the rest of this year,” he added.

Above: USD/ZAR shown at weekly intervals with Fibonacci retracements of January 2023 uptrend indicating possible areas of technical resistance, as selected moving averages denote either support or resistance. Click image for closer or more detailed inspection.