Pound to South African Rand Forecast: Risking Losses to 22.84

© Lefteris Papaulakis, Adobe Images

The Pound to South African Rand exchange rate has unraveled much of July’s rally already but it would risk falling further in the days ahead, and as far as roughly the 22.84 level, if the US Dollar remains soft.

Sterling broke below notable support coming from the 61.8% Fibonacci retracement of its July rally against the South African Rand at 23.08 on Monday, exposing the 78.6% retracement further down around 22.86.

This extended correction from late July highs around 23.80 came as the US Dollar weakened broadly to open the new week, extending its recent run of losses against most counterparts in the G20 grouping.

The ongoing retracement lower in USD/ZAR has been the primary driver of the continued sell-off in GBP/ZAR, which could be likely to find support around the 22.84 level in the event of any further losses up ahead.

“USD/ZAR has retracted after facing resistance at the descending trend line drawn since April near 18.66. It is now in vicinity of the lower limit of its multi-month range,” Societe Generale strategists said on Friday.

Above: GBP/ZAR shown at daily intervals with Fibonacci retracements of July rally indicating possible areas of technical support for Sterling. Click image for closer or more detailed inspection.

“In the event the pair fails to defend 17.87/17.80, there would be risk of extension in the downtrend towards the next projections at 17.65 and the July 2023 trough of 17.50/17.42,” they added in a note to clients.

USD/ZAR’s break below the above-referenced low from its year-to-date range on Monday has left the pair at risk of falling as far as the 17.40 to 17.50 area in the short-term, which would weigh further on GBP/ZAR.

GBP/ZAR would be likely to test the 78.6% Fibonacci retracement of its June rally around 22.86 in that scenario, even if Sterling also manages to remain buoyant against the US Dollar in the interim.

However, both GBP/ZAR and USD/ZAR pairs could receive a modest boost on Wednesday if South Africa’s July inflation figures are softer than expected as this would lead the market to become more confident that the South African Reserve Bank may be likely to cut its interest rate as soon as the next meeting.

In the absence of a domestic impulse from the inflation data, the trajectory of the US Dollar is likely to remain the dominant influence on GBP/ZAR and USD/ZAR with any further softening sure to elicit weakness.

Above: GBP/ZAR shown at weekly intervals alongside USD/ZAR.

“Dollar price action has been soft. Gains made on the back of last week's robust July retail sales have proved fleeting and today's dollar weakness is not being led by softer US rates. It therefore seems like speculators are looking to explore some broad dollar weakness,” ING strategists said in a Monday note to clients.

Whether the nascent turn lower in the US Dollar is sustained will largely come down to the remarks made by Federal Reserve Chairman Jerome Powell at the Jackson Hole Symposium on Friday.

Market focus will be on whether he validates or pushes back against current expectations for as much as 100 basis points worth of interest rate cuts from the Fed this year, which matters for the US Dollar because this such easing would be likely to erode its yield advantage over many other major currencies.

“Our sense is that while he may take a dim view of recent speculation of a 50bp rate cut in September, the overall message is likely to reassure market participants looking for confirmation that policy rate cuts are now imminent,” Capital Economics economists wrote in a Friday research briefing.

“As such, the greenback may well remain under pressure in the near term, although given the extent to which Fed easing is already discounted, we doubt there is that much further dollar weakness in store,” they added.