Written by John Cameron on January 25th, 2012
If the ITEM Club’s predictions come to pass, then the official UK government GDP data released tomorrow, is likely to be supportive for the Pound.
By John Cameron
Foreign Currency Market Update – GBP / ZAR Update
The Pound spent the Christmas period and much of the first three weeks of the New Year under heavy selling pressure against the Rand, due to a combination of weak UK data releases and general support for the South African currency thanks to an increase in investor’s appetite for riskier assets. This took the GBP ZAR exchange rate to a new 3-month low of 12.2120 on January 19th which should now act as a key level of support for the pair. Demand for the Rand has ebbed since this significant low was reached, as investors moved to scale back their exposure to risk. This move has seen the pair trade close to 12.50 during today’s session; if the risk-off trading environment persists, then a revisiting of 13.00, which was last seen in the week preceding Christmas, can not be ruled out.
Bad news stories dominated for Sterling last week. Official government figures released on Wednesday showed that British unemployment hit a seventeen year high of 2.68m in the three months to the end of November 2011. Widely-respected think-tank, the Ernst Young ITEM Club increased downward pressure on the Pound when they released a report which had used the UK Government’s official economic modelling software to predict that the UK economy is about to double-dip its way into another recession. Tuesday’s UK inflation data show that domestic consumer prices are rising at a slower rate of 4.2%, as of last month. A UK interest rate hike appears further away then ever. Meanwhile, South African interest rates remain at 5.5% and there is no sign that South Africa’s Central Bank is considering cutting from this level. The last time the South African Reserve Bank cut interest was in September 2010.
*Denotes the importance of the data item *** being the highest level.
***Preliminary estimate of Q4 GDP is out on Wednesday (09:30) with markets looking for a 0.1% contraction quarter on quarter, and 0.8% annualised growth
**Bank of England minutes from the last meeting are out at the same time as the GDP data. The market will be looking for any changes in the panel’s interest rate bias and comment on the size of the asset purchase facility (otherwise known as quantitative easing).
If the ITEM Club’s predictions come to pass, then the official UK government GDP data released tomorrow, is likely to be supportive for the Pound. However, a forward move for the GBP ZAR exchange rate looks possible if institutional investors continue to shun risk. If Iran’s rulers follow through on their threats to throttle global crude oil supplies following this week’s EU embargo on the Iranian oil industry, then downside is likely for both global share markets and for the risk-sensitive Rand. An escalation of the standoff between eurozone policy-makers and Greece’s creditors would be likely to decrease global appetite for risk. If either situation arose, then a renewed run at the key 13.00 level could be possible for the GBP ZAR exchange rate.
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