John BenjaminThe GBP/ZAR is an exotic currency pair of contrasts. The British pound (GBP) represents the UK, a developed G7 economy, whereas the South Aftican rand (ZAR) represents an emerging market economy, or EME. Currently trading at around 19.84 (as of 21 June 2021) – 14.6% lower than its 52-week high of 23.24 – does the pair have some good trading opportunities ahead?
The rand may fluctuate in the short-term, but historically it’s weaker than the pound. As an export-oriented economy, South Africa needs to keep its goods and services competitive. Hence, the economy requires a relatively weaker pound to rand exchange rate. But the ZAR also needs to find a balance so as not to depreciate too much against a basket of currencies, including the GBP.
At the moment, the biggest risk to ZAR is the pandemic – there’ve been more reported cases for the latest third wave than for the first. Consequently, South Africa’s Prime Minister, Cyril Ramaphosa, announced a level 3 lockdown on 15 June 2021. For now, restrictions are not very tight. But a deteriorating situation may demand stringent lockdown measures that could hit the economy.
In this pound to rand prediction, we’ll take a look at the major factors affecting the GBP/ZAR currency pair and explore the fundamental outlook for the two countries’ economies.
GBP to ZAR outlook: higher commodity prices in favour of South Africa
The South African economy recovered from a sharp dip in growth after being hit by Covid-19 in 2020. The nation avoided a technical recession in 2020, but the Covid-19 pandemic made its mark.
Yearly GDP data for 2020 shows a 7% contraction – the sharpest decline in economic growth for over a century. More recent data shows a modest recovery.
On an annualised basis, the first quarter of 2021 saw South Africa’s economy rise 4.6%. That’s down from the 5.6% growth in the fourth quarter of 2020. But it marks three consecutive quarterly periods of growth.
South Africa’s economic resilience during the Covid-19 crisis was due to a combination of domestic and global factors.
On one hand, lockdowns suppressed demand, leading to lower imports, but higher global commodity prices boosted South Africa’s gold and platinum exports. With exports surpassing imports, South Africa boasted a current account surplus for the first time in two decades.
The South African Reserve Bank (SARB) expects current account surplus to average around 1.3% of GDP in 2021.
Compared with the UK, trade in goods and services was lower at £7.7bn by the end of 2020 – down 22.6% on the same period a year earlier.
Although smaller than for previous periods, imports from South Africa into the UK stood at £4.4bn, leaving the UK with a £1.1bn trade deficit.
With global monetary policy tightening, policy makers in South Africa brushed aside fears.
UK’s monetary policy tightening and impact on the ZAR
In the UK, officials are contemplating reducing the money supply. Inflation topped the Bank of England’s (BoE) target of 2.0%, coming in hot at 2.1%. Consumer prices are adding to inflationary pressure. The central bank forecasts inflation to reach 2.5% this year.
Andrew Bailey, the BoE’s Governor, said that he was prepared to rethink its stance if there’s evidence of sustained higher consumer prices. Some members of the BoE’s policy making body, including BoE Chief Economist Andy Haldane, are calling for the central bank to curtail its bond purchases.
There’s a real chance that the UK may end its pandemic-era monetary policy. In contrast, emerging market economies are still struggling to contain the virus outbreak.
Higher interest rates in the UK could boost the GBP vs ZAR rate in the short-term. But as far as policy tightening goes, the BoE is likely to start scaling back its asset purchases. Any interest rate hike might not happen before early 2022.
Traders could learn more when the Bank of England's Monetary Policy Committee meets on 24 June 2021.
A fast recovery for the UK’s economy would increase demand for goods and services. The base scenario of the UK’s GDP growth averaging 7.2% in 2021 could help increase exports from South Africa.
GBP to ZAR forecast 2021 – technical Outlook
The chart above shows the historical pound to rand exchange rate. On the weekly chart time frame, we see the Fibonacci retracement levels. The dashed horizontal lines mark long-term retracement levels. The shorter horizontal lines show the Fibonacci retracement levels from 27 March 2017 lows to 13 April 2020 highs.
The 17 March 2017 lows coincides with the 68.2% retracement level on the price chart. Following this, the GBP/ZAR price also retraced 38.2% of the second smaller leg.
We also see how the pound to rand currency pair is currently following the trend line. As long as this trend line holds, we may see upside momentum building up. However, if the GBP/ZAR breaks the trendline, then the pound may fall to 18.60 in the short-term.
Overall, the short-term retracement levels indicate the pound to rand exchange rate remaining within the 20.54 – 18.60 range. But a breakout from these levels will set the direction of the trend in the medium-term.
You might have noticed the bullish pennant pattern on the GBP/ZAR chart. This pennant pattern from the weekly chart increases the probability of an upside breakout in the long-term. If the price can break the 20.54 upper range, the next target will be the 20 April 2020 close at 23.50.
Trade British Pound / South African Rand CFD
It’s important to note that past performance is no guarantee of future returns. You should never invest more than you can afford to lose. Whether the GBP/ZAR is a good buy for your portfolio depends on your personal risk tolerance and investing goals.
We suggest investors and traders exercise caution before investing in any asset. We recommend you do as much research as possible, taking into consideration the latest market trends, expert opinion, fundamental and technical analysis.
Don’t forget that you can trade GBP/ZAR with contracts for difference at Capital.com. CFDs give you a possibility to speculate on the GBP/ZAR exchange rate forecast, opening a long or a short trade depending on your predictions.
