GBP/ZAR Gaps Lower in Exhaustion Move – Recovery Expected

The Pound to South African Rand has gapped down on Monday morning due to market relief at the outcome of the first round of the French presidential election.  

The result – a win for Macron and run off between Macron and Le Pen - is the most likely combination to deliver a pro-Euro President, as Macron is estimated to have the best chances of beating Le Pen of any candidate.

The outcome led to recovery in global risk appetite across and a rise in risky assets, one of which is the South African Rand.
GBP/ZAR pair tumbled from Friday’s close at 16.825 to the new week’s open at 16.666, however, the gap down is not expected to extend for several reasons.

The first reason is that of the different categories of gap this one best resembles an exhaustion gap signalling the end of a move lower.

It is probably not a ‘breakaway’ gap as it has not broken out of a clear price pattern; nor is it likely to be a ‘running’ or ‘measuring’ gap as the trend down was not strong enough.

If it is an exhaustion gap it must signal the end of the current down-move, which began at the start of April.

This also fits with the shape of the correction since the April 4 highs, which has formed a classic three-wave correction or a-b-c correction as they are also known.

It appears to be a merely corrective move, which once complete, will probably lead to a resumption of the uptrend.

Normally the c-wave is roughly equal in length to the a-wave and with the exhaustion gap this morning wave-c now appears to be about equal to ‘a’ and therefore probably complete.

The trend higher is therefore expected to resume imminently.

We see a move above the day’s high at 16.682 as providing confirmation that the gap is closing and leading to a rise to 16.746, probably even higher.

Key Data in the Week Ahead

For the Rand: there are no major tier one releases and so data is unlikely to have a huge impact on the Rand which is more subject to general global risk trends than domestic economic data but on Wednesday, April 26 Producer Prices for March, which measure factory gate inflation, are released at 10.30 GMT.

Money Supply (M3) and Private Sector Credit are released at 07.00 GMT on Friday 28.

For the Pound: the main release is GDP data on Friday (09.30 GMT) when the preliminary estimate for the first Quarter is released, and expected to show a slower 0.4% pace of growth compared to the previous period but an elevated 2.2% increase year-on-year (that is compared to Q1 in 2016).