Pound to Rand Consolidation Range Narrows as Dollar Risk Rises

• GBP/ZAR trading narrowing consolidation range 
• 19.4733 to 19.8564 range possible in short-term 
• Directional risks tilted higher as USD finds feet
• But tough resistance at May highs above 20.20

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The Pound to Rand exchange rate is trading within a narrowing consolidation range that could be likely to span the gap between 19.4733 and 19.8564 in the days ahead, although directional risks may be on the upside if the Dollar finds its feet following a fortnight-long decline. 

South Africa’s Rand ceded ground to many counterparts on Tuesday as most other currencies including beat a retreat from a Dollar that had risen back on to its feet following a fortnight long setback that had multiple catalysts and drivers.

The Rand slipped against all currencies within the G20 basket except the Euro and New Zealand Dollar although the climb in GBP/ZAR was limited by Sterling’s retreat back beneath the 1.26 level against the Dollar. 

Tuesday’s Dollar bounce followed a Monday evening op-ed suggesting the White House would support whatever action the Federal Reserve (Fed) ultimately feels compelled to take in order to bring down U.S. inflation.

“With the next two FOMC meetings in June and July, and strong FOMC communication of a 50bp hike at each, growing market conjecture that the Fed may pause after this has added to the rand strength recently and the calming of SA bond yields too,” says Annabel Bishop, chief economist at Investec. 

Above: Pound to Rand rate shown at 4-hour intervals alongside USD/GBP and USD/ZAR. Click image for more detailed inspection.

“Much will therefore depend on the US jobs data, with payroll figures and unemployment rates back in the spotlight. US consumer confidence has fallen on incoming rate hikes, while strong consumer spending likely reflects a desire to make purchases before prices rise even higher.

There is reportedly a White House meeting taking place on Tuesday between President Joe Biden and Fed Chairman Jerome Powell, although it was unclear whether there would be a statement to follow or if that had much to do with Tuesday’s rebound by the Dollar. 

Dollar strength came amid broad declines by the Euro, which fell after European Union members agreed to cut around 90% of oil imports from Russia by the end of the year through a sixth sanctions package. 

A rising Dollar is typically a headwind for the Rand and upward influence for GBP/ZAR, although so too are rising oil prices in most market conditions.

Above: Pound to Rand rate shown at daily intervals alongside USD/GBP, USD/ZAR and spread - or gap - between 10-year GB and SA government bond yields. Click image for more detailed inspection.

“Yesterday, the rand traded very close to the best levels of the month, although it failed to breach beyond the medium term support level around 15,4000; this level is likely to prove resilient in the short term,” says Walter de Wet, a fixed income and currency strategist at Nedbank, in reference to USD/ZAR. 

Tuesday’s declines by the Rand came ahead at the opening of a holiday-shortened week for U.S. traders and in advance of a series of key economic reports including Institute for Supply Management surveys of the manufacturing and services sectors as well as the May non-farm payrolls report.

It’s possible that any upsets relative to market expectations would feed the recently popular notion that the Fed being likely to pause its cycle of interest rate rises later this year, although what that would mean for the Dollar is unclear given the possible international spillover from a slowing U.S. economy. 

“We think current expectations are at risk of being proved overly dovish. While we agree that the next few months should result in the top end of the Fed funds range reaching up to 2%, beyond that we see a more aggressive Fed policy path,” says John Velis, an Americas FX strategist at BNY Mellon. 

Above: USD/ZAR shown at daily intervals alongside U.S. Dollar Index and with Fibonacci retracements of May decline indicating possible short-term technical resistances for the Dollar and support for the Rand. Click image for more detailed inspection.

Tuesday's price action demonstrates the extent to which international factors can be highly influential, if not all encompassing of the Rand, coming hard on the heels of Statistics South Africa data suggesting that national unemployment fell for the first time since the onset of the coronavirus pandemic last quarter.

The unemployment rate fell to 34.5%, from 35.3% previously and was helped along by some 370k new jobs having been created in the community and social services fields, as well as some 263k in the manufacturing industry. 

"We note that South Africa is likely to better weather the ongoing challenges from the Russia/Ukraine war given its relatively small exposure to the two countries, its large wheat harvest and it being well positioned to take up slack in associated shortages of key commodities such as gold, platinum and iron ore," says Michael Kafe, an economist at Barclays. 

We expect Absa PMI (Wed) and S&P PMI (Fri) to print at 52.5 and 50.7, respectively. We also expect South Africa’s trade balance (Thu) to show a healthy surplus of ZAR 43bn (cf 20.2bn), which should support ZAR," Kafe also said of other economic reports due out over the balance of the week. 

Above: GBP/ZAR shown at daily intervals with Fibonacci retracements of 2022 decline indicating possible short-term technical resistances for the Pound and support for the Rand. Click image for more detailed inspection.