Pound to Rand Week Ahead Forecast: Ramaphosa Rally Brings 20.80 into View

• GBP/ZAR pressured following Ramaphosa's ANC election win
• Risk of further slippage near to 20.80 ahead of festive holidays
• But strong technical support likely in event of declines to 20.69
• U.S. PCE data the highlight with limited offering from UK & SA 

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The Pound to Rand pair entered the new the week on the back foot after the re-election of President Cyril Ramaphosa as leader of the African National Congress incited a rally in South African exchange rates that appeared to place GBP/ZAR at risk of falling back toward the 20.80 area in the days ahead.

South Africa's Rand was the outperformer in the G20 currency complex on Monday after President Cyril Ramaphosa won a landslide victory in a contest with former Health Minister Zweli Mkhize for the leadership of the African National Congress, a position that is key to retaining the presidency. 

The vote draws a line under recent uncertainty about the stability of the government and comes in the wake of an independent review into the president's handling of a theft at one of his residences, findings of which had led to calls for an impeachment from some parts of the party and parliament.

"The race was tighter than expected a few weeks ago, but not as tight as feared by the market earlier this morning," writes Mitul Kotecha, head of emerging market strategy at TD Securities, in a Monday note to clients. 

"The market is likely to reward the fading of political uncertainty for now with a strong rand and lower yields, though none of South Africa's structural issues will be immediately resolved by this vote," Kotecha and colleagues add.

Above: Pound to Rand rate shown at daily intervals with selected moving-averages and Fibonacci retracements of September and October rallies indicating possible areas of technical support for Sterling. Click image for closer inspection. 

The vote stands the Rand in good stead at the opening of a week in which the South African and UK economic calendars will offer little insight or direction ahead of Friday's release of the Personal Consumption Expenditures (PCE) inflation readings in the U.S.

Whether or not these confirm the further softening of inflation pressures indicated by the consumer price inflation indices is potentially relevant for the Federal Reserve (Fed) interest rate outlook with the pace of inflation within the non-housing services sector the most important detail. 

"In tune with the peaking of US CPI inflation, these are expected to moderate to a rise of 5.5% in the headline rate with the core measure expected at 4.7% y/y," says Jane Foley, head of FX strategy at Rabobank. 

The non-housing services sector is the main part of the U.S. economy that is currently in the crosshairs of the Federal Reserve for its robust labour market and the relatively high pace of wage and salary growth afforded by this so the pace of inflation there is most pertinent for the U.S. Dollar outlook. 

But with the festive period approaching in parts of the world including the large market economies there is uncertainty over the likely scale of investor participation and extent to which data could be expected to impact currencies.

Above: USD/ZAR shown at daily intervals alongside Dollar-Renminbi rate and with Fibonacci retracements of April rally indicating possible areas of technical support. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

Beyond the week ahead, however, much about the outlook for many economies and currencies is likely to depend on how quickly U.S. inflation falls as this will determine whether the Fed then has to deliver on last week's upgraded forecasts suggesting its interest rate could rise as far as 5.5% early next year.

"The USD is under a bit of pressure led by gains in commodity FX and the ZAR," writes Bipan Rai, North American head of FX strategy at CIBC Capital Markets, in a Monday market commentary. 

"The market remains biased to testing the Fed’s resolve and it’s forecasts. For now, we prefer expressing views via the crosses and remain neutral/bearish on the USD over the medium-term," he adds. 

Fed policy can impact interest rate decisions of other central banks and so matters for economies and currencies beyond the U.S. borders and that means data relating to U.S. inflation and employment are likely to remain important influences on exchange rates in the new year. 

This is after Fed Chairman Jerome Powell warned last week that unemployment remains too low and wage growth too high in many parts of the economy for the 2% inflation target to be achieved any time in the near future.