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GBP ZAR Exchange Rate Slips as Markets Reassess BoE Rate Hike Odds

June 16, 2017 - Written by Ben Hughes

As the Bank of England (BoE) proved unexpectedly divided at its June policy meeting the Pound South African Rand exchange rate was prompted to trend sharply higher.

Markets had anticipated just one dissenting vote at the meeting, leading investors to pile back into Sterling when the minutes revealed that three policymakers were in favour of an immediate interest rate hike.

Even so, as analysts at Scotiabank noted:

‘Signs that policy makers are perhaps getting uncomfortable with rising inflation may support the GBP near-term but we doubt there chances of a tightening are realistic at this point.’

Given that prominent hawk Kristin Forbes is departing the Monetary Policy Committee (MPC) after this meeting the likelihood of an imminent interest rate hike are distinctly limited.

Even though inflation is already running well above the BoE’s target range concerns about muted wage growth and the health of the wider economy are likely to limit the hawkishness of policymakers.

With BoE Governor Mark Carney still committed to a neutral policy outlook at this juncture the chances of any greater shift on the MPC seem limited.

So long as economic data continues to disappoint and point towards a general slowing UK interest rates are likely to remain at their current historic lows for the foreseeable future.

GBP ZAR Exchange Rate Vulnerable to Brexit Developments

With Brexit negotiations set to get formally underway on Monday the predominant pressure on GBP exchange rates could remain to the downside in coming weeks.

Even after suffering a serious blow in the snap general election Theresa May appears to still favour a hard-line approach to Brexit, boding ill for the outlook of the domestic economy.

Any signs that the minority Conservative government is shifting towards a less belligerent approach, possibly easing its emphasis on migration figures, could give investors renewed cause for confidence, though.

While a confidence and supply agreement between the Conservatives and the controversial Democratic Unionist Party (DUP) reportedly imminent the sense of political instability is likely to continue to plague the Pound.

Questions remain over Theresa May’s ability to hold onto her position as Prime Minister, which could lead to further Sterling volatility in the near future.

Even though Brexit developments are certain to dominate the thoughts of investors the latest public sector net borrowing figure could provoke some volatility for the GBP ZAR exchange rate.

If new government debt is found to have risen by less than forecast this could shore up the Pound, even if the overall deficit continues to widen.

South African Political Worries Weigh on Rand Demand

Demand for the South African Rand slumped ahead of the weekend, meanwhile, in response to planned government changes to rules surrounding the mining sector.

Investors were unsettled by the suggestion that mining companies operating in the country could be forced to increase the minimum number of black-owned stakes from 26% to 30%.

This created a fresh sense of confusion around the Rand, encouraging renewed selling as confidence in the outlook of the South African economy slumped once again.

There are concerns that the implementation of these rules could lead to reduced investment in the domestic mining industry; a particularly concerning development when the economy as a whole is already under pressure.

With the ruling African National Congress (ANC) still showing signs of infighting and instability the mood towards the Rand looks unlikely to improve materially in the near term.

The general appeal of emerging market currencies also weakened as a result of the Federal Reserve’s latest policy meeting, which saw policymakers take a more hawkish view on monetary policy.

If market risk appetite remains limited the upside potential of the Rand will remain limited, to the benefit of the GBP ZAR exchange rate.

However, the Rand could find a rallying point if May’s inflation data offers fresh cause for confidence.

So long as the inflation rate remains comfortably within the South African Reserve Bank’s (SARB) target range this could encourage investors to buy back into the Rand.

On the other hand, a fresh uptick in inflationary pressure could bode ill for the South African economy, raising the odds of the SARB having to take further policy action imminently.
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