Pound to Rand (GBP/ZAR) Exchange Rate Slides as UK Inflation Slows to 20-Month Low

December 19, 2018 - Written by John Cameron

STORY LINK Pound to Rand (GBP/ZAR) Exchange Rate Slides as UK Inflation Slows to 20-Month Low

The Pound South African Rand (GBP/ZAR) exchange rate is on the defensive this morning as markets react to the UK’s latest Consumer Price Index (CPI).

Pound (GBP) Struggles as UK Inflation Slows

The Pound South African Rand (GBP/ZAR) exchange rate fell roughly 0.5% through the first half of Wednesday’s European session, following the publication of the UK’s latest CPI figures.

According to data published by the Office for National Statistics (ONS), inflation in the UK slowed from 2.4% to 2.3% in November, in line with market expectations but striking its lowest levels since March 2017.

The ONS attributed the dip to a significant drop in prices at the fuel pump, after crude fell heavily between October and November, with softening price growth in clothes and recreational items also contributing to the downturn.

Some analysts believe the downtrend in inflation may continue throughout 2019 driving it below the Bank of England’s (BoE) 2% target, but remain confident that this will not stop the bank from raising interest rates next year.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said:

‘CPI inflation still looks set to be below the [Bank of England's] 2% target right from the start of 2019 and to average just 1.8% over the course of the year.

However the [Monetary Policy] Committee believes that interest rates still are well below neutral levels and that no spare capacity exists.

As such, we continue to expect the MPC to increase Bank Rate to 1.25% by the end of next year, from 0.75% currently.’

South African Rand (ZAR) Bolstered by US Dollar (USD) Softness

Meanwhile the South African Rand (ZAR) trended higher through Wednesday morning as a dip in the US Dollar (USD) proved positive for the emerging market currency.

This drop in the US Dollar came in the run up to the US Federal Reserve’s latest rate decision.

While the Bank is widely expected to raise interest rates again today, with CME’s FedWatch tool placing the odds of a December hike at over 70%, investors are bracing for what many economists suggest will be a ‘dovish hike’.

This is expected to see the Fed’s forward guidance for 2019 indicate that the US central bank will target fewer rate hikes next year, potentially leading into a rate pause.

The resulting weakness in the US Dollar this morning has fed into increased risk demand from markets, leading the Rand and many other risk-sensitive currencies to tick higher.

GBP/ZAR Exchange Rate Forecast: Will the BoE’s Forward Guidance Bolster Sterling?

Looking ahead, barring any major Brexit developments, movement in the the Pound South African Rand (GBP/ZAR) exchange rate in the second half of the week looks set to be dominated by the Bank of England’s final rate decision of the year.

While no policy changes are expected from the BoE this month, Thursday’s decision will also be accompanied by the Bank’s forward guidance for 2019.

This is likely to be the driving force behind any movement in Sterling in the second half of the week and could see the UK currency shoot higher if the recent upswing in domestic wage growth leads the bank to signal that it may accelerate the pace of rate hikes in 2019, so long as a Brexit deal is reached at the start of the year.

Lending further support to the Pound may also be the release of the UK’s latest retail sales figures, as economists forecast tomorrow’s data will reveal sales growth rebounded from -0.5% to 0.3% in November.

Meanwhile in the absence of any notable domestic data, the South African Rand is likely to be left at the mercy of markets in the latter half of this week’s session, potentially strengthening the currency if risk appetite rises in the wake of the Fed’s rate decision.

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