Pound-to-South-African-Rand Rate in the Week Ahead: Pausing in an Uptrend

- GBP/ZAR is pulling back from overbought extremes.

- But overall uptrend remains intact, is likely to resume.

- BoE in focus for GBP while EM trade jitters dominate ZAR.

Image © Government of South Africa

The Pound-to-South-African-Rand rate fell for the third consecutive session at the start of the new week after following reports alleging that officials are sacrificing much needed detail in order to get a quick fix in the Brexit negotiations, but the bigger picture supports a bullish outlook for GBP/ZAR.

The Rand enjoyed a brief recovery Monday due to a dissipation of concerns about the emerging market (EM) outlook but the Pound-to-Rand rate remains in a strong medium-term uptrend.

Above: Pound-to-Rand rate shown at daily intervals.

The RSI momentum indicator is exiting the overbought zone, which is a bearish sign. We won't know until the end of the day, however, whether it will achieve a close below the overbought threshold, which would be a bearish sell signal for the pair. The RSI alone, however, is not enough to suggest a reversal as the dominant uptrend is strong.

We think the weakness over the last few days is only temporary, and the pair will probably just move sideways for a while before resuming its uptrend.

One possible scenario is that the pair could consolidate between the 19.53 August highs and the 20.13 September highs, before eventually breaking higher and reaching a target of 20.50. Such a move would be confirmed by a break above the 20.15 level, near the previous week's highs.

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The South African Rand: What to Watch

Any further news concerning US plans to impose a 25% tariff on a greater amount of China's exports to the US could impact negatively on the Rand as well as most other emerging market currencies in the week ahead.

More tariffs will probably weaken the Rand as they would encourage more capital outflows from the developing world and could strengthen the US Dollar in the process.

President Donald Trump further inflamed tensions Friday by saying he is ready to slap tariffs on virtually all Chinese exports to the US. This would mean duties on another $267bn of goods in addition to the $200bn already facing tariffs.

Yet markets remained strangely resilient to the threat, with the Rand rising against both the Pound and Dollar on Monday morning, despite the comments sparking a sell-off in Asian equity markets overnight.

A actual announcement of more duties could hit the Rand, however - and strengthen the Dollar. A stronger Dollar would also be negative for the Rand because South Africa has a high level of Dollar denominated debt and a weaker currency would increase the cost of servicing and repayment.

More generalised jitters in emerging markets could also infect the Rand this week, given the way the Turkish Lira crisis fanned out to the east and west, ultimately encompassing India, South Africa, Indonesia and South America.

Countries with budget as well as current account deficits, like South Africa, are most at risk of contagion because they are more reliant on outside financing that becomes more expensive as currencies depreciate.

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The Pound: What to Watch

It is a busy week for UK data with several key data releases, and the Bank of England (BOE) meeting scheduled to finish on Thursday at 12.00 B.S.T.

The BOE raised interest rates by 0.25% at their August meeting but they are not expected to continue raising them in September.

Brexit uncertainty remains a key risk factor preventing them from going ahead - unless a deal is struck by Thursday, which seems a little unlikely even under the most optimistic scenarios.

"As for the BoE, which is scheduled to announce policy on Thursday of next week, we do not expect many new developments. The BoE raised its Bank Rate 25 bps to 0.75% at its August meeting, and further increases seem unlikely to be considered unless or until Brexit uncertainty is resolved," say analysts at global investment bank Wells Fargo in a recent client briefing.

The September meeting does not include a press conference or quarterly inflation report further reducing the chances they will use it to announce any changes in policy.

"The BoE last raised interest rates in August, lifting them above 0.50% for the first time since 2009. It is widely anticipated to hold rates unchanged at 0.75% next week. With no press conference and quarterly inflation report at the September meeting, the Pound may struggle to get much reaction from the BoE’s decision," say brokers XM in a preview of the event.

Another key event for the Pound in the week ahead is wage data which is scheduled for release at 9.30 B.S.T. on Tuesday, September 11.

Wages are leading indicator of growth and inflation pressures and a higher-than-expected increase would probably result in a rise in the Pound as it would increase the probability of the BOE raising interest rates.

Consensus expectations are for wages to rise by 2.5% in July from 2.4% previously (plus bonus). The Unemployment rate is forecast to remain unchanged at 4.0%.

Industrial and manufacturing production figures for July are out at 9.30 on Monday and are both forecast to show 0.2% growth from the previous month.

"Among the key releases will be industrial output figures, which will likely be closely watched for any clues that Brexit uncertainty is affecting manufacturing sentiment," say Wells Fargo.

Trade data is also out in the week ahead with the trade balance forecast to show a marginal widening to 11.75bn July, and Non-EU balance to show an increase to -3.30bn from -2.94bn previously, when the data is released at 9.30 on Monday.

Monthly GDP data at 9.30 and The National Institute of Economic and Social Research (NIESR) GDP mates at 14.00 are also out on Monday and could impact on the Pound if they present a negative outlook for growth.

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