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GBP ZAR Exchange Rate Extends Gains on Rate Hike Speculation Ahead of BoE Comments

July 11, 2017 - Written by David Woodsmith

Ahead of the latest commentary from Bank of England (BoE) policymakers the Pound South African Rand exchange rate strengthened sharply.

Investors were encouraged to pile back into Sterling in anticipation of comments from deputy governor Ben Broadbent, who has yet to air his opinions in the wake of June’s unexpectedly split policy meeting.

While Broadbent is thought more likely to lean towards the dovish side this was not enough to discourage a solid Sterling rally on Tuesday morning.

As researchers at TDS noted:

‘While we think an August hike is out of the question, if Broadbent joins Chief Economist Andy Haldane in pushing for a rate hike sooner rather than later, it could tip the balance of the committee just enough to result in majority vote against Governor Carney later this year.

Speculation over the prospect of an imminent interest rate hike is likely to persist, however, even if Broadbent does take a less optimistic tone at this juncture.

This could limit any downside potential for the GBP ZAR exchange rate in the short term, with debate over the timing of the next BoE interest rate hike set to endure for some time to come.

Pound Forecast to Weaken on Slow UK Wage Growth

Wednesday’s raft of UK labour market data is also set to provoke volatility for the Pound, especially given the general disappointment of recent ecostats.

Of particular interest will be the latest wage growth figures, with weak wages being one of the key concerns that has encouraged BoE dovishness.

Forecasts point towards a slowdown in average weekly earnings in the three months to May, however, which could put significant downside pressure on GBP exchange rates.

With inflation already far outpacing wage growth there are concerns that consumer spending will weaken further in the coming months, removing support from the UK economy.

If inflationary pressure continues to build at a rapid pace and erodes household finances further this could drag on domestic economic growth, given that high levels of spending have helped to support conditions in the wake of the Brexit vote.

As the post-referendum weakness of the Pound has shown little sign of boosting UK exports, given the continued widening of the trade deficit, the outlook for the economy remains rather muted.

Boris Glass, senior economist at S&P Global Ratings, noted:

‘Growth is set to remain on a moderate trajectory as imported inflation squeezes household budgets and uncertainty about the outcome of the EU exit negotiations dampens investment.’

Unless the labour market figures or June’s RICS house price balance better expectations the strength of the Pound is likely to be limited in the coming days, leaving the GBP ZAR exchange rate vulnerable.

Underwhelming Manufacturing Weighs on South African Rand

Demand for the South African Rand, meanwhile, has softened on the back of a general decline in market risk appetite.

A disappointing Chinese consumer price index report undermined the appeal of higher-yielding assets at the start of the week, especially as bets continued to mount over the prospect of another Federal Reserve rate hike.

May’s South African manufacturing production figures failed to impress, meanwhile, as output was found to have contracted on the month.

This dented confidence in the health of the domestic economy, even as concerns over the proposed nationalisation of the South African Reserve Bank (SARB) eased.

As a sense of political uncertainty continues to hang over the South African outlook the Rand may struggle to gain any significant traction in the near future.

Even so, the mood towards the Rand could improve somewhat if the first quarter consumer confidence index shows an improvement.

While worries over the future of the domestic economy are likely to persist any signs that domestic sentiment is picking up could weaken the GBP ZAR exchange rate.

However, if sentiment deteriorates further this could encourage investors to continue selling out of the Rand, especially if the wider sense of market risk appetite is still lacking.
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