The South African rand is staging a comeback this week, paring back some of the recent losses that started in February. The USD/ZAR exchange rate dropped to 16.62, down modestly from this month’s high of 16.96. So, will the pair continue falling or rebound ahead of the South African Reserve Bank (SARB) and Federal Reserve interest rate decisions?
South African rand rises as consumer inflation falls
The USD/ZAR pair continued its strong downward trend on Wednesday after the country’s statistics agency published the latest inflation report.
This report showed that the country’s inflation cooled in February before the Iran war started. The headline Consumer Price Index (CPI) rose 3% in February compared with 3.5% a month earlier. This report was slightly better than the median estimate of 3.1%.
Core inflation, which excludes the volatile food and energy prices, dropped from 3.4% in January to 3% in February. However, the two gauges rose 0.4% and 0.7%, respectively on a month-on-month basis.
Still, February’s inflation report is seen as a lame duck as it happened before the Iran war started. This war will likely have an impact on inflation in South Africa and other countries as it has pushed crude oil, natural gas, and fertilizer prices higher.
Therefore, analysts believe that SARB will leave interest rates unchanged at 6.75% in the upcoming meeting on March 26. Pausing its rate cuts will help officials assess the impact of the ongoing war on inflation in the country.
The ongoing war has led to South African rand and bonds being sold by foreigners. Data shows that non-residents sold $2.45 billion of government bonds last week, the biggest outflow since 2019. This is a big turnaround as these investors bought bonds and stocks in the first two months of the year.
Federal Reserve interest rate decision
The most immediate catalyst for the USD/ZAR pair will be the upcoming Federal Reserve interest rate decision, which comes later today.
Economists expect the central bank to leave interest rates unchanged between 3.50% and 3.75%.
Jerome Powell and other officials are concerned about inflation, which is expected to keep rising in the coming months as energy prices jump. Analysts believe that inflation will rise to 3% if oil prices remain above $95.
Still, the bank is concerned about stagflation, a situation where high inflation coincides with a high unemployment rate. The most recent data showed that the unemployment rate rose to 4.4% in February.
Another report showed that the economy grew at a slower pace than expected in the fourth quarter of last year.
USD/ZAR technical analysis
USDZAR chart |Source: TradingView
The daily timeframe chart shows that the USD to ZAR exchange rate has rebounded in the past two months, moving from a low of 15.64 to a high of 16.95 this month.
This rebound happened after the pair formed a double-bottom pattern and a neckline at 16.42, its highest level in February this year.
It has now pulled back this week as oil prices have largely stabilized. Still, it remains above the 50-day and 100-day Exponential Moving Averages (EMA). It has also remained above the Supertrend indicator.
Therefore, the pair will likely resume the uptrend in the coming days, potentially to the year-to-date high of 16.95. A move above that level will point to more gains, potentially to the key resistance level at 17.50.
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