Pound / Rand Rate Forecast for the Week Ahead: Strong Resistance Ahead

- GBP/ZAR has rallied up to meet a tough barrier in the 17s

- Q1 Manufacturing data is the main release for the Rand in the week ahead

- The Pound could be impacted by industrial and manufacturing production, and wage data

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The Pound is enjoying a strong start to the new week against the South African Rand, moving over a percent higher to high 17.14.

The pair has therefore risen up and surpassed our previous week-ahead forecast target at 17.00.

Looking ahead, our technical studies do suggest the exchange rate will soon be meeting a tough resistance zone which runs along the March 19 highs (see chart below).

Momentum is nevertheless strong (see circled indicator) but this level will still probably act as an obstacle to further gains as it is not just the location of the March 19 highs but also several other previous highs as well.

Historic highs often block rising prices.

The reason for this is complex, but it is partly because traders who betted prices would go higher at or just below the previous highs, but were subsequently proven wrong are so relieved to see their losing positions breakeven when prices re-touch the highs that they are tempted to exit their trades rather than risk being wrong again. It is also partly from short-term technical traders betting on the exchange rate pulling back from resistance.

Thus, from a technical POV the pair is likely to find more upside tough going, however, if it successfully breaks through the resistance zone by moving above 17.15 that would probably open the way for a move higher to a target at 17.30.

At 17.30 the exchange rate will run into a further resistance from the 200-day moving average, which is also likely to limit upside progress.

Trending prices often stall, pull-back or even sometimes reverse at the level of large moving averages like the 200-day, because it is used by large speculators, fund managers and retail traders alike as a decision-making tool, and is therefore subject to an increased level of volatility.

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News and Events to Watch for the South African Rand 

The main releases for the South African Rand in the week ahead are manufacturing and mining data.

Manufacturing Production is expected to show a 0.5% rise in February compared to the extremely weak -1.6% reading in January, when it is released at 12.00 GMT on Tuesday, April 10.

Rather more upbeat than the consensus is Peter Worthington, analyst at ABSA, who expects a higher 1.3% rise in Manufacturing on Tuesday due to expecting "some payback in February after the sharp contraction in January."

Other sources of data for the Manufacturing sector - such as the survey based PMI data - have been mixed .

"Survey-based measures of activity in the sector have provided mixed signals. While the Absa manufacturing PMI improved in the first two months of the year, rising above the 50-point neutrality mark in February, it collapsed to 46.9 in March.

"Moreover, the more detailed ABSA quarterly manufacturing survey showed that although business confidence improved in the sector, this appeared to mostly reflect hopes of a turnaround in the future rather than any significant improvement in current business conditions," says Worthington.

The other fundamental focus in the week ahead is likely to be public sector pay negotiations which have taken a damaging turn after unions threatened to strike.

The Ramaphosa government is offering workers in bands 1-10 a 5.5% rise and 11-12 a 4.5% rise (1.5% and 0.5% above CPI respectively), which is lower than that offered by Zuma, and lower than than they were previously used to.

"Unions are demanding a CPI+3%, which is higher than what is offered. As it stands, it seems we are heading towards a dispute and a strike in the public sector, which will not bode well for growth," says Isaah Mhlanga, an anlayst at RMB.

"The revised offer shows that the government is trying to tackle the problem of a bloated public sector wage bill, which has made the challenge of fiscal consolidation so much harder," says ABSA's Worthington.

Unions have enjoyed generous pay increases ever since the financial crisis, and are unlikely to accept substantially lower pay now.

Data and Events to Watch for the Pound

The consensus now appears that recent poor business survey data was as a result of the weather - the 'Beast from the East' - rather than a real economic slowdown.

This means the Pound is probably on course for more gains as the Bank of England (BOE) are still likely to raise interest rates in May as most expect.

Higher interest rates are the fuel which drives currency trends as international capital-flows now dictate currency values, and they tend to move to places where interest rates are higher, all other things being equal, as that's where they will earn the most return.

Yet notwithstanding the weather, some doubt has now crept into whether the BOE will still pull the trigger in May.

In the coming week, there will be a heavy focus on wage inflation since if that rises the BOE is more likely to want to cool the economy with higher interest rates. In this respect, the IHS Markit REC recruitment industry survey, out at 23.00 GMT on Tuesday, April 9, may be instructive, as it includes the latest pay information from recruiters, according to Chirs Williamson, Chief Economist at IHS Markit.

"With the Bank of England having laid the ground for a May rate hike, the focus will, therefore, fall heavily on pay trends. In that respect, the REC recruitment industry survey will give an update on new starter and temp/contract staff pay rates, both of which tend to move in advance of pay growth in the wider economy," he says.

Another major release in the week ahead is Industrial and Manufacturing Production data for March at 9.30 on Tuesday, and the Trade Balance at the same time, which is forecast to narrow to -11.9bn in February from -12.3bn in the previous month - a narrower trade balance is sometimes positive for currencies, although the correlation of late seems to be waning.

Finally, a heads up for Retails Sales in March comes in the form of the CBI Retail Sales monitor, out at 12.01 on Tuesday.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.