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Pound to South African Rand Exchange Rate Struggles to Hold Gains as Rand Volatile

February 23, 2021 - Written by Frank Davies

Despite continued strong demand for the Pound, the British Pound to South African Rand (GBP/ZAR) exchange rate is struggling to hold its advance attempts. This is because the risky emerging market correlated South African Rand continues to benefit from global risk demand, though its appeal has been dented slightly by market anticipation for upcoming South African budget news.

Last week saw a sharp rebound in GBP/ZAR from the pair’s worst levels in over a month.

After opening last week at the level of 20.14, GBP/ZAR briefly touched on a low of 20.05. This was the worst level for GBP/ZAR in over a month, since the beginning of January.

GBP/ZAR quickly surged back from those lows though as the South African Rand was hit by uncertainty over global commodity trade. GBP/ZAR ultimately gained almost half a Rand, and closed the week well higher, in the region of 20.57.

This week, GBP/ZAR briefly attempted to continue its surging recovery, briefly touching on a high of 20.89. This was the best level for GBP/ZAR all month, since the end of January.

Since then though, GBP/ZAR has recoiled slightly. At the time of writing GBP/ZAR is still attempting to advance but only trends slightly higher in the region 20.66.

Pound Sterling (GBP) Exchange Rates See Little Shift on Mixed UK Jobs Report

The Pound continues to benefit from speculation that Britain’s economy will be one of the first major economies to fully recover from the coronavirus pandemic. This continues to be the primary cause of the Pound’s recent bullishness across the board.

UK vaccination schemes are progressing smoothly and despite a slower than hoped roadmap for easing restrictions, analysts predict that Britain’s economy could recover to pre-pandemic levels by the end of 2021.

Today’s UK job market report did little to knock this confidence in Britain’s recovery outlook.

Unemployment worsened as expected, and more jobs were lost than feared, but the latest wage growth data beat forecasts.

Some analysts also warn that Britain’s real unemployment outlook could be worse than the data shows. According to Cathal Kennedy, European Economist at RBC Capital Markets:

‘because of pandemic related restrictions, a number of those out of work at present are not ‘actively seeking employment’ and therefore not classified as unemployment under the LFS definition.

It wasn’t explored in detail in the MPR but Governor Bailey recently commented that the BoE thought that the true level of UK unemployment was closer to 6.5%.’

South African Rand (ZAR) Exchange Rate Recovery Attempts Limited by US Yields

The South African Rand is a currency often correlated to risk and emerging market sentiment. As a result, it has become more appealing amid global coronavirus recovery hopes in recent months.

However, over the past week or so volatility in US Treasury yields has led to broad volatility in the South African Rand as well.

This is because the South African Rand is sensitive to US yield movements. Higher US yields are making investors a little more hesitant to take risks, but this is weighing on the Rand more than other risk-correlated currencies.

According to Lee Hardman, Analyst at MUFG:

‘The ZAR has been one of the most sensitive EM FX recently to rising US yields,

A sharp move higher in US yields, especially real yields could increase downside risks for EM FX more broadly if not backed up by stronger fundamentals’

On top of volatility in US yields, investors are also hesitant to buy the South African Rand too much this week ahead of South African national budget announcement.

GBP/ZAR Exchange Rate Forecast: Coronavirus and South African National Budget in Focus

Investors may continue to find the Pound more appealing in the coming sessions, as there is unlikely to be much shift in the British currency’s strong outlook.

The UK government’s restriction easing roadmap has not been a shock to markets and investors will likely remain optimistic about Britain’s potential to recover from the pandemic before the end of the year.

As a result, the Pound is only likely to be influenced by potential developments in the coronavirus situation, as well as strength in rival currencies.

The South African Rand could drive movement more in the coming sessions, particularly if tomorrow’s South African national budget announcement surprises investors.

If the budget contains more support to help South Africa’s economy weather the pandemic it could boost support for the South African Rand.

On the other hand, a disappointing budget or poor South African trade balance on Friday could lead to bigger losses in the South African Rand and make it easier for the British Pound to South African Rand (GBP/ZAR) exchange.
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