GBP / ZAR Forecast for This Week
The Pound to South African Rand exchange rate (GBP/ZAR) has traded in wide, volatile, daily ranges recently because of political uncertainty in the UK and Moody’s credit rating downgrade of South Africa.
The look and feel of the chart, however, suggests the Pound is more vulnerable to further weakness.
A break below the 16.1677, May 29, lows would signal the start of a new falling sequence of peaks and trough which would probably indicate a resumption of the dominant downtrend – whilst those lows hold, however, this is not the case.
A break below the aforesaid lows would probably open the gates to a continuation down to a target at 15.8000, at least, possibly even lower.
The MACD momentum indicator is below its zero-line signalling the trend is down.
The 50-day and 200-day moving averages are clustered at around the 17.000 level where they provide a ceiling to prices and lessen the chances of an uptrend taking root (see black box below).
Moving averages are not just indicators of long-term value but also provide dynamic support and resistance to price growth in and of themselves.
Fundamentals: What to Watch in South Africa
Moody’s last week downgraded the credit rating for South Africa on Friday to BAA3 from BAA2; they also downgraded the outlook to “Negative”. The downgrade concluded an assessment begun in April.
Despite the downgrade Moody’s kept South Africa at investment grade, which means it can still borrow from major international investors such as pension funds, but it is only one notch above ‘junk’ grade, which would eliminate it from such circles.
The opposition party argued the downgrade was a “vote of no confidence” in the new finance minister Malusi Gigaba, who took over after Pravin Gordhan was shuffled out of the cabinet by President Zuma.
Gordhan was widely respected as a relatively safe pair of hands but was not popular with Zuma who finally ousted him at a reshuffle at the start of April.
Moody’s acknowledged that “political developments” had a “negative impact on “institutional strength” in their assessment.
The Rand held up surprisingly well following the downgrade, and actually rose against the weaker Pound which was knocked by the indecisive outcome of the election.
However, the outlook is now dim for the currency.
"The downward slide in credit ratings continues. The Moody’s decision on Friday to downgrade SA was expected but it also kept the outlook on negative. As such, both Moody’s and S&P are threatening to take the local credit rating below investment grade and it would need each of them to act once to see SA excluded from major global bond indices and generate large capital flight," says John Cairns of Rand Merchant Bank.
The South African Rand, nevertheless, held up very well, with limited losses on Friday and without any indication that there will be further damage today.
"Once again this speaks to the rand’s remarkable resilience and again highlights how the natural tendency of the rand at present is to push stronger,” says Cairns.
Global risk appetite remains a primary driver of the currency and from this perspective the next major release will be the Federal Reserve Rate Meeting on Wednesday evening at 19.00 BST.
If the Fed is positive about the global economy the Rand could move higher, especially against the relatively weak Pound, thus supporting our technicaly bearish forecast for the pair.
What to Watch for the Pound
It is a busy week for domestic data out of the UK, but having said this, the main driver of the Pound is likely to be political, and more importantly whether the wind is blowing towards a harder or softer Brexit.
On the hard data front, however, the week kicks off with May Inflation data at 09.30 BST on Tuesday, which is expected to show a slower 0.2% rise compared to the 0.5% rise in April.
Employment data is out at 9.30 on Wednesday, June 14, and although the Unemployment Rate is forecast to remain at a very low 4.6%, it is the Average Earnings Statistic which will be the centre of attention given economists concerns about falling real earnings impacting on consumer spending.
The May Retail Sales release is out on Thursday Morning a 9.30, and is forecast to show a dramatic slow-down, and even a -0.8% contraction compared to the previous month rise of 2.3%.
The Bank of England (BOE) rate meeting is on Thursday at 12.00 but no change in policy or voting is expected, and arch-hawk Forbes will not be present.
