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GBP ZAR Exchange Rate Loses Ground Ahead of BoE Credit Report

October 11, 2017 - Written by David Woodsmith

While worries over Theresa May’s future as Prime Minister eased somewhat over the weekend this failed to keep the Pound South African Rand exchange rate on a stronger footing for long.

A sense of political uncertainty is continuing to weigh on the outlook of Sterling, with markets jittery as the latest round of Brexit talks draws towards a close.

There are concerns that the government still lacks any particular unity on the subject of Brexit, increasing the likelihood of a potential hard exit from the EU.

Unless these talks yield signs of the UK and EU negotiators moving closer to an agreement on key issues the mood towards the Pound is likely to sour further ahead of the weekend.

Even so, as analysts at ING commented:

‘Talk of a Cabinet reshuffle dominated the weekend press, though the Sunday Times notes that the PM will wait until after the critical Brexit-focused European Council meeting on 19-20 Oct before making any changes to her Cabinet. Still, the tentative show of unanimity within the Cabinet looks to have – at least for now – drawn a line under questions about the PM's leadership. This might help to ease some of the downward pressure on GBP as fears of imminent chaos in Westminster have been thwarted.’

So long as Theresa May appears to be maintaining control of her government, and the threat of a leadership challenge appears to ease further, then the Pound is likely to hold onto some degree of market support.

Solid South African Data Shores up Rand

Confidence in the South African Rand, meanwhile, picked up in the wake of Tuesday’s better-than-expected manufacturing production data.

Investors were encouraged to find that production had rebounded strongly on the year in August, defying expectations of a fresh contraction.

This encouraged increased optimism in the outlook of the South African economy, even though domestic political concerns remain a significant downside risk to the outlook.

However, the GBP ZAR exchange rate could soon recover its lost ground thanks to market jitters surrounding the upcoming medium-term budget policy statement and the African National Congress (ANC) conference.

Focus will also fall on August’s mining and gold production figures, which could add to a more positive Rand mood if they show a similar uptick to the corresponding manufacturing data.

If the South African economy shows any signs of weakness, however, this is likely to weigh heavily on the Rand.

Upbeat BoE Credit Survey May Boost Pound Appeal

Demand for the Pound could strength tomorrow in response to the Bank of England’s (BoE) third quarter credit conditions survey.

If the BoE takes a more optimistic view in this latest report then the odds of an imminent interest rate hike are likely to remain elevated.

As analysts at ING noted:

‘The Bank of England's increasingly hawkish tone means that a rate hike increasingly looks like a question of "when" and "how much", rather than "if". The choice of the phrase "next few months" to describe rate hike timing puts November firmly on the table.

‘It seems the Bank is very keen to get out of "emergency mode" as the initial shock of Brexit subsides. It also seems that the committee is trying to be more forward-looking given the lags involved with tightening policy. But there's also likely a desire to avoid being left in the dust by the global race to tighten policy, as a result amplifying the pound's weakness. But whilst we're now penciling in a November hike, we think the chances of a series of hikes thereafter are low.’

On the other hand, if the survey highlights growing concerns over the state of the domestic economy and the increasing reliance on credit within households then the GBP ZAR exchange rate could weaken.

With markets already pricing in a relatively high likelihood of the BoE tightening monetary policy before the end of the year the Pound remains particularly vulnerable to downside pressure.

Any softness shown by the RICS house price index could also weigh on GBP exchange rates on Thursday.
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