December 15, 2020 - Written by James Fuller
STORY LINK Pound to Rand (GBP/ZAR) Exchange Rate Avoids Half-Year-Worst as Coronavirus Surges Weigh on SA Currency
The British Pound to South African Rand (GBP/ZAR) exchange rate has been struggling for direction this week so far. With Brexit uncertainties rising and coronavirus cases surging, markets are becoming more jittery and currency movement has been increasingly volatile. The Pound’s volatility is only likely to worsen as well, at least until there is some solid development in UK-EU Brexit negotiations, while the South African Rand will be focused on coronavirus news.
Brexit fears and coronavirus vaccine hopes knocked GBP/ZAR much lower last week, as the pair opened the week at the level of 20.44 and ultimately ended much lower at the level of 20.04.
When markets opened this week, Sterling attempted to recover. Its gains were short-lived and today GBP/ZAR briefly dipped to a low of 19.87 - the worst level for the pair in over half a year, since March.
Still, GBP/ZAR is holding above those lows thanks to weakness in the Rand’s own outlook. At the time of writing, GBP/ZAR is trending just below the week’s opening levels in the region of 20.01.
GBP Exchange Rates Lack Drive as Markets Await Brexit Developments
When markets opened at the beginning of the week, investors attempted a Pound recovery. Sterling’s rebound came in reaction to news that the UK and EU had agreed to extend Brexit negotiations once again.
However, the Pound’s rebound attempt was limited. The longer time goes without a Brexit deal being reached, or even any solid progress in negotiations, the more no-deal Brexit fears rise.
Analysts still believe a deal is more likely than no deal. However, the risk of a no-deal Brexit is currently the biggest risk in the outlook.
According to FX Strategists at ING:
‘Following its rebound yesterday, GBP has now stabilised, pencilling in lower odds of a negative outcome from the UK-EU trade negotiations,
The post-weekend progress in negotiations is now priced into the Pound’
The Pound’s appeal is also limited amid concerns about Britain’s economic activity amid the coronavirus pandemic.
Today’s job market report showed that unemployment and wages weren’t quite as bad as expected, but there was still a record number of job redundancies as the UK government’s furlough scheme briefly unwound.
According to Tej Parikh, Chief Economist at the Institute of Directors (IoD):
‘The pandemic took its toll on the jobs market in the Autumn.
The unwinding of the Job Retention Scheme pushed up redundancies as firms struggled amid Covid-19 restrictions. The subsequent extension of furloughing will provide a lifeline for many jobs over the difficult winter months, but the big question is what happens after’
ZAR Exchange Rates Weaken on Surging Coronavirus Infections
The South African Rand has spent much of the past few weeks benefitting from improving market sentiment.
As the Rand is often correlated to risk and emerging market sentiment, it was more appealing amid coronavirus vaccine hopes, and hopes for fiscal stimulus in the US.
However, the Rand has been unable to keep trending higher this week. Investors are selling the Rand back from its best levels, amid a combination of profit taking and some concerns over surging coronavirus cases.
While coronavirus vaccine news has been optimistic, they will take a little while to fully roll out to economies around the world. Cases of the deadly virus are seeing fresh surges this month, including across the US and in South Africa.
This is weighing heavily on the Rand’s appeal. According to Economists at ETM Analytics:
‘There's a very real risk local lockdown restrictions could be expanded and tightened in the near future, which would severely impede the ZAR's ability to capitalise on the broader improvement in market sentiment,’
GBP/ZAR Exchange Rate Forecast: Brexit and Coronavirus in Intensifying Focus
The Pound to South African Rand exchange rate will be increasingly driven by Brexit and coronavirus developments in the coming sessions.
As has been the case for Sterling lately, UK-EU Brexit negotiations will only see more and more focus until some kind of outcome becomes clear. It could happen within days, or continue to be delayed.
If a deal looks more likely or is reached, GBP/ZAR could claw back a big chunk of its recent losses. This would be especially easy if the Rand remains unappealing.
However, the Rand could also see stronger demand if markets become more willing to take risks again.
Optimism over a coronavirus recovery in 2021 is still rising. This means that the Rand’s bearish movement may be short-lived.
Still, surging coronavirus cases in South Africa could weigh on the Rand and make it easier for the Pound to Rand exchange rate to avoid losses too.
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TAGS: Pound Rand Forecasts