GBP/ZAR supported near 23.64 & 23.31 on chart short-termBetter risk appetite & Asia FX recovery potentially helps ZARAs U.S. data, Fed uncertainty & global growth fears hamper

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The Pound to Rand exchange rate fell from fortnight highs early in the new week as the South African currency made up for ground lost prior to the weekend but with a double layer of technical support acting as a buoyancy aid nearby on the charts, Sterling could be likely to remain above 23.0 over the coming days.

Widespread losses led South Africa's Rand close to the bottom of the board for the week to Tuesday in a tale of two halves for global markets as concerns about further increases in the Federal Reserve (Fed) interest rate and the trajectory of the global economy were superseded by brighter developments ahead of the weekend.

An upgraded estimate of first-quarter economic growth for the U.S. and tick lower in the Fed's preferred measure of inflation may have helped dampen U.S. Dollar exchange rates last Thursday and Friday but it wasn't until Monday and Tuesday this week that Rand pairs felt the benefit.

"At the same time, there has been more concern over weaker growth outside of the US with activity data disappointing recently in China and Europe which is continuing to weigh on commodity prices," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.

"South Africa’s terms of trade have been deteriorating for over a year now encouraging a weaker rand. Domestic factors have also become more important in driving rand weakness this year," Halpenny and colleagues write in a July forecast review.

Above: Pound to Rand rate shown at daily intervals with USD/ZAR and EUR/ZAR. Selected moving averages denote support and/or resistance for Sterling.

Rand gains on Monday and Tuesday may have been aided by a stronger performance from currencies in the Asia Pacific region where Beijing and Tokyo both made statements or took actions intended to stem earlier declines in the Yen and Renminbi, which the Rand and many other currencies are often positively correlated with,

China's Caixin Manufacturing PMI survey also fell by less than expected by economists for the month of June on Monday, suggesting the engine room of China's economy managed to avoid the kinds of recessionary conditions reported by counterpart sectors in the U.S. and Europe over recent days.

"There will be minimal data from South Africa this week, so the currency is likely to be influenced by global factors. Given the recent weakness observed in the past two weeks, there is an expectation that the ZAR could strengthen in the coming week," says Sebastian Steyne, an FX risk and hedging specialist at Sable International.

South African exchange rates could benefit in the days ahead to the detriment of GBP/ZAR if the Renminbi and Yen remain on the front foot but this Thursday and Friday's releases of the ISM Services PMI and non-farm payrolls report for June are wild card risks for the Rand and other currencies.

"All of which are likely to show the labour market continuing to absorb entrants. However, Bloomberg cautions that the US “payrolls survey doesn’t include the self-employed, and thus misses the rise of joblessness in this category. Those are not signs of genuine labor market strength,” says Annabel Bishop, chief economist at Investec.

Above: Quantitative model estimates of ranges for this week. Source Pound Sterling Live.

"With the US seen to potentially hike by another 25bp as early as July despite the softness in the economy, the rand has weakened to R18.88/USD, R20.62/EUR and R24.00/GBP, with US jobs data and the FOMC minutes key for it this week," she adds in a Monday research briefing.

While U.S. inflation has recently made good progress in returning toward its target, there is uncertainty in the market over whether and to what extent the Fed will continue to raise its interest rate over the coming months, though the latest Federal Open Market Committee forecasts indicated as many as two further increases are possible.

The markets have stopped short of pricing in the full two increases, creating room for volatility in bond yields and Dollar rates around forthcoming data releases, though many forecasters tip the Rand for a recovery once the Fed's tightening cycle comes to an end.

"We have a constructive view on the USD/ZAR at 18 by year-end 2023, driven principally by our expectation of USD weakness as the Fed stops hiking in September 2023 and pivots towards cutting in early 2024," says Tatonga Rusike, an economist at BofA Global Research, in a Friday research briefing.

"A dovish Fed and global central banks generally support a weaker USD and favour EM currencies including the ZAR," he adds.

Above: Pound to Rand rate shown at weekly intervals with USD/ZAR and EUR/ZAR. Fibonacci retracements of 2022 recovery indicate possible areas of technical support for Sterling.

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