Pound's Advance on South African Rand Reaches Resistance Point

- GBP/ZAR hits a key resistance level and pulls-back

- Short-term uptrend remains intact

- Main release for GBP is PMI data; for Rand $ is main driver

The South African Rand was seen outperforming peers at the start of a new week for global FX, however gains are proving harder to come by against a resurgent Sterling which appears to be benefiting from position squaring ahead of the new year.

For ZAR, signs of progress on ending the U.S.-China trade war appears to be a driver of near-term gains. On Sunday, U.S. President Donald Trump said a possible trade deal between the United States and China was progressing well, creating some demand for high-yield assets like the Rand.

"The trade war between the world's top two economies has unnerved financial markets and had a mixed impact on the Rand, which has lately benefited from signs of a thaw in hostilities between the two superpowers," notes a flash comment from the currencies desk at Thomson Reuters.

The Pound-to-South African Rand rate is trading at 18.30, ensuring the ongoing recovery from early-December multi-month lows continues.

But, our studies suggest the pair has reached a key technical level which has acted as a kind of ceiling restricting further growth. This level is the upper border of a possible wedge or descending channel. Despite the resistance from the ceiling we are overall bullish.

Supporting a more bullish outlook is that the short-term trend is up and the usual default position is to expect trends to extend.

Another bullish feature is the wedge pattern which has formed since the September highs. This could be a sign of more upside to come if the exchange rate can break out of the top. The rally’s following the completion of wedge patterns usually very strong.

The daily chart above shows how such a breakout might happen. A move above the 18.66 December 25 highs would provide confirmation. Such a move would then unleash an upside target at 19.45 which is equal to the height of the wedge extrapolated by 61.8%, the usual method for establishing breakout targets. It could take several weeks to a month to reach the target, which is quite far above.

The pair has also pulled-back into the 50-day moving average (MA) which is providing underpinning support and makes it more likely the pair will resume its uptrend than fall back lower.

The four-hour chart above shows the short-term uptrend within the wedge (or channel) in more detail, including the upward sequence of higher highs (HH) and higher lows (HL). It also shows the same potential breakout scenario.

There is also still a strong possibility the pair might fail to break out and could instead decline back down within the wedge. The probability of this would increase should the pair decline below the 18.16 lows, and would gain even firmer confirmation if it broke below the key 17.85, December 19 lows.

While the spot market rate on GBP/ZAR might be at 18.32 at the time of writing, high-street banks are only offering rates in between 17.70 and 17.82 for international money transfers, independent specialist providers are however offering rates between 18.16 and 18.23.

The Rand: What to Watch this Week

From a fundamental perspective, external drivers will be in control of the Rand and the currency could maintain an overall positive bias against most competitors should the U.S. continue to underperform; the Rand is negatively correlated with the Dollar.

First, there is the partial U.S. government shutdown and now also increasing uncertainty about the Federal Reserve's intentions to continue pushing up U.S. interest rates over the next two years.

At its most hawkish, the market expected the Fed to raise interest rates three to four times in 2019, but over recent weeks this has suddenly switched and now it is pricing in no rate hikes whatsoever.

“Central bank officials have approved four rate hikes this year and have indicated two more are coming in 2019, a reduction from the three forecast prior to last week’s Federal Open Market Committee meeting.” Writes Jeff Cox a correspondent with CNBC. “However, the market currently doesn’t think the Fed will hike at all next year.”

Interest rates are a major mover of currencies. When they are high or expected to rise they attract and keep greater inflows of foreign capital.

In the absence of more rate hikes, therefore, the U.S. Dollar is likely to see demand wane which will in turn prove supportive of the Rand.