South African Rand Breakout Threatens Bigger GBP/ZAR Losses

  • GBP/ZAR down towards December 2019 levels
  • USD/ZAR closes on November 2021 low after US CPI
  • Core CPI ebb is a headwind for USD/ZAR and GBP/ZAR
  • Soothing US bonds and strengthening the relative attractiveness of the ZAR

Image © SARB

The South African Rand outperformed at the start of the week and its advance against the US Dollar is even more significant as it potentially puts GBP/ZAR on course for its lowest level since December 2019.

The South African rand rose against most of the G20 collection on Tuesday with only the Brazilian real and Turkish lira leading after official data showed a hint of what could now be a drop in inflation under- underlying in the United States.

The US core inflation rate rose a record 1.2% in March, bringing the annual rate to 8.5% and its highest since the period ending in December 1991, but core inflation fell from 0.5% to 0.3% in monthly terms and was also slower than financial markets had expected.

“The sharp rise in the headline figure to more than 8.0% year-on-year reinforced market expectations for a 50 basis point hike at the FOMC meeting in May,” said Annabel Bishop, chief economist at Investec.

Many might have expected Tuesday’s eye-popping annual inflation rate to have stoked greater market appetite for the dollar or cost many other currencies, but U.S. exchange rates were almost lower. across the board following the data and the Rand was building on earlier gains. .

Above: GBP/ZAR at daily intervals with Fibonacci retracements of the June 2021 rally indicating possible areas of short-term technical support for the British pound, and displayed alongside USD/ZAR. Click on the image for a closer inspection.

“The higher-than-expected headline figure should give rise to greenback strength as it is likely to force the US Federal Reserve into a more aggressive bullish cycle,” said Ryan Booysen, managing director of DG Capital Forex.

Tuesday’s falling core inflation figure could signal the start of a statistical trend in which a slowdown in the pace of inflation month on month eventually pushes down the annual rate of inflation overall in the United States as well.

The same was seen in the Personal Consumption Expenditures Price Index figures released in late March, which showed the Fed’s preferred measure of core inflation rising at a slower pace than in February. .

“This should be the last of the jumps in inflation, with base effects and lower commodity prices easing inflation in Q2.22,” Investec’s Bishop also said on Tuesday.

Above: USD/ZAR displayed at daily intervals with Fibonacci retracements of the June 2021 uptrend indicating possible areas of short to medium term technical support for the USD. Includes a bearish moving average crossover. Click on the image for a closer inspection.

Core inflation rates do not take into account volatile and internationalized energy and food costs when measuring price changes, and are therefore often considered by central bankers to be a better indicator of domestic inflationary pressures than the core inflation rate. headline inflation.

The start of any downward trend in the month-over-month numbers could eventually have a dampening impact on market expectations for US rates, which in turn could act as a headwind for the dollar and a support factor for rand exchange rates.

“We expect the ZAR to continue to appreciate, now targeting USDZAR at 14.25 by the end of the second quarter,” wrote Eimear Daly, strategist at Barclays, in a research briefing on Monday.

Escalating inflation had prompted Fed policymakers in March to raise interest rates in larger-than-usual increments on “one or more” occasions over the coming months, and also prompted them to to plan for a large and potentially imminent reduction in the bank balance. Sheet size.

Above: GBP/ZAR displayed at weekly intervals with Fibonacci retracements of the 2017 uptrend indicating possible areas of medium-term technical support for the British pound. Click on the image for a closer inspection.

This led to a spike in US bond yields and was a source of intense pressure for many currencies, which may partly explain why the US dollar fell as the rand and other currencies rose in the wake of the data. inflation on Tuesday.

The dollar is falling and rand strength saw USD/ZAR bid for its late November low below 14.50 on Tuesday in price action that also had the effect of pulling the exchange rate between the pound and rand under heavy technical support on charts.

That leaves little technical hurdle between GBP/ZAR and its lowest levels since October 2019, but much of its outlook hinges on the broader trend in the US Dollar, and some analysts have warned that may still have to come. ascend.

“Unfortunately, the descent will be long and slow given ongoing supply chain issues, significant labor market tensions and corporate pricing power. This means the Fed needs to raise rates quickly” , says James Knightley, chief international economist at ING.

“It will have an economic cost. Higher borrowing costs, a strong dollar and a potentially challenging political backdrop as we head into the November midterms mean the U.S. economy will face intensifying headwinds,” he also said. Knightley Tuesday.

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