British Pound vs South African Rand Week Ahead Prediction: Downside Risks Dominate

  • GBP/ZAR threatened by BoE and Fed policy decisions
  • Downside risks for the USD are also a headwind for the GBP
  • BoE policy and outlook could be an additional burden

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The exchange rate between the pound and the South African rand reversed its late-April gains at the open of a shortened holiday week, but could risk falling back towards last month’s lows in the coming days due to of a mix of Bank of England (BoE) and Federal Reserve (Fed) monetary policy.

Both the rand and South African pound have been volatile lately, each suffering heavy losses at the hands of a strengthening dollar in the waning light of April and price action that pushed the GBP/ZAR above 20.00 on Monday.

But the exchange rate between the pound and the rand reversed that gain on Tuesday, dragging the pound to its lowest against the South African currency since April 21 and ahead of key policy decisions from the Fed on Wednesday and the BoE Thursday.

“So far this quarter, the rand is averaging R15.08/USD, weakening significantly in the second half of April as markets grow increasingly concerned that the US will hike rates. much more interest than SA in Q2.22 and H2.22,” says Annabel Bishop, chief economist at Investec.

“Tomorrow evening’s FOMC meeting (SA time) will be a key driver for the domestic currency, with a 50 basis point hike in US interest rates priced in by markets, although there are instead concerns about a 75 basis point hike, which has particularly pushed the rand lower recently, Bishop said on Tuesday.

Above: GBP/ZAR displayed at daily intervals with Fibonacci retracements of the 2022 fall indicating likely areas of technical resistance for the British pound and support for the rand. Includes selected moving averages. Click on the image for a closer inspection.

The Fed is widely expected to hike its interest rate by 50 basis points to 1% and announce the start of a process to cut the nearly $9 trillion in government and mortgage bonds. held on its balance sheet, commonly referred to as quantitative. tightening (QT).

“The US Dollar experienced marked strength, which changed the EUR/USD forecast and also impacted the USD/ZAR projections, allowing for an average of R/USD 15.40 for the rand this quarter, although ‘it risks further weakness,’ says Bishop of Investec.

“That is, the rand remains at risk from a lower interest rate hike cycle in South Africa than in the United States, as the national currency has seen a steep depreciation in the past. when the gap between U.S. and South African interest rates narrowed significantly,” she said. also said on Tuesday.

All this after a dramatic shift in the bank’s monetary policy stance in March and April, which saw Fed policymakers suggest in chorus that “one or more” 50 bp larger-than-usual increases basis of the Fed Funds rate may be required. in the coming months to contain inflation in the United States.

Above: South African rand forecast: Source: Investec. Click on the image for a closer inspection.

“This week there is also no significant data from South Africa. Analysts are waiting to determine if the recent ZAR weakness continues or if we see a moment of respite,” said Tim Powell, forex director at Sable International.

The resulting escalation in market expectations and subsequent rise in US bond yields has pushed the dollar higher while toppling developed and emerging market currencies like dominoes in recent weeks.

However, there is a risk that the Fed will postpone the announcement on QT on Wednesday while it is also possible, if not very likely, that the latest economic forecasts from the BoE will undermine the market’s enthusiasm for the pound, the two together implying further downside risks for the British Pound. /ZAR and USD/ZAR this week.

“Given so much is being priced in, it’s reasonable to wonder if a ‘sell on’ reaction could emerge this week for the USD, particularly if US economic releases disappoint. This week’s data includes key US labor data for April,” says Jane Foley, head of FX strategy at Rabobank.

“That said, while the USD may be susceptible to a pullback in the near term, we are increasingly seeing a build-up of risks that could keep the USD stronger for longer in the medium term,” Foley said on Tuesday. .

Above: USD/ZAR at daily intervals with Fibonacci retracements of the November 2021 drop indicating possible technical resistance areas for dollar support to the rand. Includes selected moving averages. Click on the image for a closer inspection.

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