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Old 07-23-2018, 06:32 PM
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Default GBP/ZAR Recovery May Be Limited by Brexit Fears

Despite the numerous factors weighing heavily on the Pound (GBP) this week, pound rand exchange rate recovered from its worst levels on Thursday due to risk-aversion and dovishness from the South African Reserve Bank (SARB).

Since opening this week at the level of 17.61, GBP/ZAR has tumbled and on Wednesday briefly touched a monthly low of 17.27. Since then though, GBP/ZAR has rebounded and at the time of writing on Thursday the pair was trending near the level of 17.50.

Investors sold off the South African Rand (ZAR) as the latest SARB policy decision saw the Central Bank lower its expectations for South Africa’s 2018 growth rate.

However, the Pound’s potential for recovery against the Rand was limited as Thursday’s UK retail sales results were highly disappointing, rounding off a highly bearish week for the embattled Pound.

Pound (GBP) Exchange Rates Unappealing as Bank of England (BoE) Rate Hike Bets Slide
The Pound was unable to capitalise on South African Rand weakness on Thursday, as the latest UK retail sales data rounded off a bearish week for the British currency.

Following turbulent Brexit jitters at the beginning of the week and a disappointing UK inflation report on Wednesday, Britain’s June retail sales report fell short of forecasts in every major print.

UK retail sales were forecast to slide from 1.3% to 0.2% month-on-month, but instead contracted from a revised 1.4% to -0.5%.

Yearly retail sales were similarly disappointing. While the previous figure was revised higher from 3.9% to 4.1%, the June print slumped to 2.9% rather than the expected 3.7%.

Analysts noted that in reaction to the news, bets that the Bank of England (BoE) would hike UK interest rates in August fell again to around 50-50.

Brexit uncertainties dominated Pound movement for most of the week, and now the British currency is seeing additional pressure from BoE uncertainties.

South African Rand (ZAR) Exchange Rates Sold as South African Reserve Bank (SARB) Cuts Growth Outlook
The South African Rand (ZAR) outlook worsened on Thursday, as the South African Reserve Bank (SARB) cut its South African growth forecasts.

The SARB left South African monetary policy frozen as many economists expected, but slashed its 2018 Gross Domestic Product (GDP) growth forecast from 1.7% to just 1.2%.

Notably, the bank also slightly lowered its 2018 South African inflation forecast, from 4.9% to 4.8% – but warned that inflation risks were to the upside, partially due to global factors. According to SARB Governor Lesetja Kganyago:

‘Developments in the international environment have placed upward pressure on the inflation trajectory, while the domestic growth outlook remains challenging,’

On top of the South African Reserve Bank caution, the South African Rand has been weighed by aversion to risky emerging market currencies.

As the US-China trade war hit headlines again due to the Chinese Yuan’s (CNY) fall in value, investors found the risky Rand even less appealing.

Pound to South African Rand (GBP/ZAR) Forecast: Brexit and Trade Developments in Focus
CBI’s UK business optimism and industrial trends stats, as well as South Africa’s June PPI results, will be published next week.

As the week will be a little quieter in terms of UK and South African data, the Pound to South African Rand (GBP/ZAR) exchange rate is likely to be driven largely by developments regarding the Brexit process and the US-China trade war.

For now, the Pound outlook is highly limited, as investors are uncertain about the kind of Brexit deal the UK will end up with – or if it will even get a deal at all.

Bank of England (BoE) interest rate hike bets remain mixed too, with investors anxious that Britain’s economy is too weakened by Brexit uncertainties to sustain higher interest rates.
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