Pound-South African Rand Forecast: Week Ahead Should see Support at 18.80 Remain Firm

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- ZAR a top performer of late

- GBP/ZAR downtrend could be arrested at 18.80

- U.S.-China trade developments pose key risk to ZAR ahead of year-end

The Pound has been steadily losing ground against the South African Rand since late October when it spiked to multi-year highs just above 1.1960.

These levels, reached on October 31 and November 01, do however appear to be the exchange rate's high-water mark, for the time being at least.

The GBP/ZAR exchange rate has since slid back towards 19.00, which it is now pivoting around: gains above here tend to be fleeting, and weakness also tends to fade and ultimately the exchange rate ends up back around the 19.00 marker.

It is also worth noting that GBP/ZAR rarely tends to spend time above 19.00 on an historical basis; if we look back to the turn of the century, it is possible to note that time spent above 19.00 is rare and that the exchange rate prefers trending between 10.00 and 19.00.

Given the market has been trending lower since late October, we are of the opinion that the balance of risks favours further downside in the near-term, i.e. the coming week.

That said, there is a solid level of support to be found at 18.80, the pair has tested this level on two occasions since early November, and on both occasions it bounced higher.

Therefore, any weakness that we see over coming days could ultimately dry up at 18.80 where Sterling might find some bids. That said, a break below this support level would open the door to more meaningful lows as trades clustered around here are cleared out, so readers watching GBP/ZAR should be keeping an eye on this potentially important level.

From a fundamental perspective, the South African Rand is likely to continue taking its cue from developments in global investor sentiment, with the rule-of-thumb being that the currency rises when global investors are positive and buying into high-yielding stocks, commodities and emerging market bonds.

Recent weeks have seen expectations for a breakthrough in U.S.-China trade talks provide a positive backdrop for global markets, and this coincides with the Rand's recent appreciation against Sterling.

If the mood continues into year-end, there is little reason to doubt that ZAR can continue to make gains on the likes of the Pound, U.S. Dollar and Euro.

However, any sudden deterioration in trade talks would prove a surprise, and leaves assets such as ZAR at risk of a deep correction lower.

"Markets are anxious for news on the pending Phase One trade agreement because the 15 December deadline for the next round of duties is nearing. Neither party has made much progress on the pressing issues standing in the way of this trade deal," says Shireen Darmalingam, an economist with Standard Bank in Johannesburg.

"China is adamant that the US must first roll back all tariffs - but the U.S. insists that that would be done only once this partial trade deal has been signed; also, the US insists that China would still need to increase purchases of US agricultural goods," adds Darmalingam.

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