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GBP to ZAR Exchange Rate Recovery Attempt Limited as UK Economy Sees Worst Shrinkage in 300 Years

February 12, 2021 - Written by Toni Johnson

Despite today’s UK growth rate report beating forecasts, Britain’s economic data remained broadly concerning and the British Pound to South African Rand (GBP/ZAR) exchange rate remains under pressure as a result. The South African Rand looks like it could sustain much of the impressive gains it saw over the past week, as markets digest the latest State of the Nation Address from South Africa President Cyril Ramaphosa.

After opening this week at the level of 20.38, GBP/ZAR briefly attempted to rise, but its bullish movement was short-lived despite the Pound’s generally broad appeal.

The South African Rand took influence in GBP/ZAR movement and the pair spent the week tumbling lower. On Thursday, the Rand surged and overnight GBP/ZAR touched on a low of 20.17.

This was the worst level for the pair in over a month, since early January.

Since then GBP/ZAR has rebounded slightly as the Pound attempts recovery, but gains are limited and GBP/ZAR is still trending low in the region of 20.23 at the time of writing on Friday.

GBP Exchange Rates Struggle to Recover amid Worst Economic Slump in Centuries

It’s certainly a shocking figure: Britain’s economy has reportedly seen its worst contraction in 300 years due to the impact of the coronavirus pandemic in 2020.

Today’s UK growth rate results from December and Q4 2020 actually beat forecasts. The quarterly growth rate came in at 1.0% rather than the forecast 0.5% while yearly growth was –7.8% rather than the expected –8.1%.

However, even with forecast-beating data the overall picture was too gloomy for markets to have much optimism about.

Britain’s economy shrank by around –9.9% in 2020 overall, and economists are noting that this was the worst yearly contraction in an incredible 300 years, since the ‘Great Frost’ caused Britain’s economy to shrink 13% in 1709.

Plus despite the Q4 growth causing Britain to avoid a double-dip recession, analysts predict that Britain’s economy will see further contraction in early 2021 amid the current lockdown.

According to Debapratim De, Senior Economist at Deloitte:

‘Stricter and more prolonged restrictions are likely to drive a further contraction in the first quarter before vaccinations and better weather enable a summer rebound. However, regaining lost activity due to the pandemic will take longer. We forecast UK GDP to reach pre-pandemic levels in spring 2022.’

ZAR Exchange Rates Benefit from Market Sentiment and Hopes over South African Outlook

The South African Rand is a currency correlated to risk and emerging market sentiment. As a result, it often benefits in times of global market optimism.

Rising hopes for coronavirus vaccination rollout and global economic recovery from the pandemic has made investors more eager to take risks, which is boosting risk-sentiment and the South African Rand over the past week.

Some stronger than expected South African data and anticipation for a major speech from South Africa’s President also boosted the Rand in the middle of the week.

In his 2021 State of the Nation Address, South Africa President Cyril Ramaphosa said that he would continue to attempt to stamp out corruption in South Africa.

In more positive news for markets, Ramaphosa also announced that grants offered during the pandemic would be extended. He said:

‘Over the last few months, we have had ongoing discussions with our social partners in business and labour, who proposed an extension of some of the social and economic support,

We have therefore decided to extend the period for the Special Covid-19 Grant of R350 by a further three months.’

GBP/ZAR Exchange Rate Forecast: Inflation and Retail Stats Expected Next Week

The past week’s UK data and South African political developments have left the Pound to South African Rand exchange rate weaker.

However, any shifts in data strength or market sentiment next week could make it easier for the pair to recover again.

Next week’s data could be highly influential as well, and it is more spread throughout the week.

Wednesday will see the publication of UK and South Africa inflation rate results from January. South Africa’s December retail sales results will also be published.

Friday’s session will also be vital for UK data. UK retail sales stats from January and PMI projections for February could be highly influential to the UK outlook if they surprise investors.

Of course, coronavirus developments will remain key for GBP/ZAR movement as well.

If South Africa’s coronavirus situation shows more signs of improving, investors may be willing to pile into the South African Rand more.

There is potential for the Pound to South African Rand exchange rate to recover instead though, if markets become less optimistic about the pandemic.
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