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GBP to ZAR Exchange Rate Update: South African Rand on 'Back Foot' vs Pound, Euro and the US Dollar

August 27, 2017 - Written by Frank Davies

The pound to rand exchange rate has seen a strong start to the new week, quoted at 16.85377, 0.35 per cent higher than the day's open.

The South African currency is also seen lower than both the euro and the US dollar.

Although the second revision of the second quarter UK gross domestic product showed no change in the headline growth figure this failed to particularly shore up the GBP/ZAR.

While the South African inflation rate eased from 5.1% to 4.6% on the year in July this was not enough to significantly dent the Rand.

Persistent US Dollar weakness helped to buoy the emerging market currency ahead of the weekend, even though some members of the Federal Open Market Committee (FOMC) opted for a more hawkish tone in comments at the Jackson Hole economic symposium.

With the South African Reserve Bank (SARB) still under pressure to make further interest rate moves and as domestic political tensions remain, though, the underlying support for the Rand remains somewhat limited.

Brexit Developments Forecast to Dominate Pound Outlook

Confidence in the Pound is likely to remain limited in the coming days, in large part thanks to worries surrounding the issue of Brexit.

While markets welcomed Foreign Secretary Boris Johnson’s admission on Friday that the UK will have to pay its divorce bill this has not materially altered the outlook for negotiations.

GBP exchange rates have remained under pressure even as the Conservative government appears to be softening its approach, even though markets had hoped for such signals previously.

Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman, noted:

‘This year, it seemed like Sterling appreciated on developments that encouraged expectations of a soft exit and weakened on the prospects of a hard exit. Despite the position papers, which some see as the UK drawing out its views on numerous examples of climbing down from the more strident positions earlier, Sterling trades like a dog.’

EU officials have not reacted with particular enthusiasm towards any of the UK position papers, sticking to the view that the divorce must be settled before any discussion of a future relationship.

Even as the UK and EU negotiating teams return to the table this week there is very little hope of any substantial progress towards an agreement on any of the major issues.

As Chandler continued:

‘Last month, the EU told the UK to clarify its position and these papers are meant to do that. However, Britain still seems not to grasp the crux of the situation.

‘It is resisting the fact that once Article 50 is triggered the initiative shift to the EU. The UK still is trying to dictate the agenda of the negotiations. The EU negotiators won't allow this to happen. It is not a question of spite but realpolitik. The EU insists that there is sufficient progress on the terms of the amputation before a prosthetic is discussed. The UK resists this simple principle.

‘The EU seems to want to address three issues before negotiating a new relationship. After resisting any financial settlement, the UK has softened its stance but has not yet committed. The rights of citizens of other EU countries in the UK needs to be addressed. There is also the Irish border that needs to be addressed.’

As a result the GBP ZAR exchange rate looks vulnerable to further deterioration in the coming week, unless there is any significant breakthrough at the negotiating table.

Rand Could Weaken on Narrowed SA Trade Surplus

The appeal of the Rand could weaken in the coming days, however, if the South African balance of trade for July proves disappointing.

Any narrowing of the trade surplus could give rise to fresh worries over the outlook of the domestic economy, particularly as political worries continue to weigh on the minds of investors.

On the other hand, if trade conditions are found to have improved on the month this could offer the Rand a fresh rallying point on Thursday.

An uptick in July’s producer price index figures could also weigh on the GBP ZAR exchange rate, with any improvement in the inflationary outlook likely to boost demand for the Rand.

However, if market risk appetite starts to falter once again in response to developments in the US this could prevent the Rand from holding onto any particular strength this week.
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