Pound-Rand Rate Forecast for the Week Ahead: Top of the Range Eyed
- GBP/ZAR remains stuck trading in a range in the lower 17s
- The main event for the Pound is the Bank of England rate meeting on Thursday
- For the South African Rand, the main event is the release of manufacturing production data
© moonrise, Adobe Stock
One Pound buys 17.01 South African Rand at the time of writing, more or less unchanged from the previous week when the exchange rate closed at 17.08.
Looking at the exchange rate from a technical perspective, the GBP/ZAR appears to be trapped trading in a range roughly located between 16.80-90 and 17.30-40.
It is currently at the bottom of the range but if the sideways trend continues the pair's next move could be to rise back up to the top of the range again at circa 17.30.
The range highs are capped by the 200-day moving average (MA) at 17.29 which appears to be obstructing further upside progress.
The weekly chart offers little more insight as it too shows the pair in a sideways trend, only a longer-term range which has been in operation since 2016, and although the pair has formed a bearish shooting star (circled) the short-term trend is up.
Sideways ranges are typically difficult to forecast so we have decided that it is more prudent on balance to adopt a neutral stance until a stronger trend starts to develop and we will be taking more guidance from fundamental drivers as a result.
Data and Events to Watch for the Rand
ZAR will likely take cues from global drivers in the week ahead with markets maintaining a sharp focus on the broader trend in the US Dollar which has been the key feature for markets thus far in May.
The Dollar's strength has pushed up the cost of oil and thus the cost of doing business in South Africa while also pushing up the cost of servicing USD-denominated Debt.
It is easy to see why a strengthening Dollar could drag on SA economic performance, and thus the Rand. "Just to remind those that hang the local unit’s performance on domestic factors: roughly 60% of Rand movements are driven by global factors - the value of the US Dollar and commodity prices," says Isaah Mglanga with RMB.
On the data front, the first major release of this week for the Rand is SACCI (South African Chamber of Commerce and Industry) Business Confidence in April out at 10.30 GMT on Wednesday, May 09 which should give a good indicator of how domestic businesses are feeling as we move into the halfway point of the second quarter.
Gold and mining production data is out on Thursday at 10.30 and the latter is forecast to show a -2.6% fall in March compared to the same time in the year before; a beat on expectations could be mildly positive for ZAR.
Manufacturing production is out at 12.00 on Thursday and is forecast to show a -0.1% fall month-on-month - a considerable slowdown from the -2.4% fall in February.
Data and Events to Watch for the Pound
The main event in the week ahead for the Pound is the Bank of England (BOE) interest rate meeting on Thursday, May 10 at 12.00 GMT.
Whilst previously expectations had been for the BOE to raise interest rates by 0.25% at the meeting, data showing a slowdown in growth and commentary from the governor of the BOE, Mark Carney, which brought into question the necessity of a May hike, have dampened expectations more recently.
Official market expectations now stand at roughly 20% for a hike, and Sterling has decline alongside these fading expectations. A recent survey of economists held by Bloomberg found that none of them now expect a rate hike on Thursday.
Therefore - we would expect a substantial boost were the Bank to defy expectations and raise interest rates. In theory, the Pound could retrace much of the losses witnessed over recent weeks.
The BOE's inflation report is also out at the same time, and will show the Bank's latest forecasts for the economy and can provide insight into how the Bank may formulate policy in the future.
If it expects inflation and growth to rise, for example, that could be bullish for Sterling as it will imply more rate hikes, and higher interest rates are usually positive for a currency.
We would expect guidance to be important for Sterling - what does Carney's assessment of the recent growth slowdown, is it temporary or does he believe it to be more entrenched? Will the BOE confirm further interest rate rises are indeed necessary over coming weeks? These are where we see the big story for Sterling lying.
A more upbeat assessment of the economy and the outlook could certainly turn sentiment towards Sterling for the better, while a downbeat tone could allow the recent sell-off to extend.
"We expect clear evidence of a sustained rebound in GDP growth to pave the way for next rate hike to in November 2018, followed by two more hikes in 2019," says a preview note from Berenberg.
"Our baseline case is that next week will mark a three-month postponement to rate increases, with the next 25bp hike occurring in August," says Phillip Shaw, an economist from Investec.
Data releases are second-tier in nature. On Tuesday, May 08 at 8.30 large mortgage lender Halifax releases its house price index, which is forecast to show a decline of -0.3% month-on-month in April.
Wednesday sees the release of the British Retail Consortium's (BRC) Sales Monitor, which is forecast to show a -0.7% fall in April compared to April in 2017.
Thursday, May 10 sees the release of the Royal Institute of Chartered Surveyors (RICS) House Price balance just after midnight, which is expected to show a -1.0% fall in April.
Also out on Thursday is Industrial and Manufacturing Production at 9.30 with the former expected to show a 0.1% rise mom, and the latter a -0.2% decline.
Finally, the UK trade balance is out on Thursday and is forecast to show the trade deficit widening to -11.40bn in March.
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