The USD/ZAR exchange rate has moved sideways in the past few days even as the US dollar index retreats. The USD to South African rand jumped to a high of 18.40, which was higher than this week’s low of 18.17.
US jobs data ahead
The South African rand weakened modestly against the US dollar after the Federal Reserve delivered its interest rate decision. After its two-day meeting, the Federal Reserve decided to hike interest rates by 0.25% in a bid to continue fighting the stubbornly high inflation.
In his press conference, Jerome Powell said that the decision to hike and continue with quantitative tightening was unanimous. This differed from the previous meeting where some members of the committee supported pausing interest rate hikes.
He also said that the bank was not thinking about rate cuts since inflation remains stubbornly high. Data published last month showed that the headline inflation dropped to 5.0% in March. On the positive side, crude oil prices have crashed hard this week, which will help push gasoline prices lower.
The South African Reserve Bank (SARB) has also turned excessively hawkish in the past few months. It has already hiked rates by 425 basis points since November 2021. It did this to fight inflation, which has also remained stubbornly above the 4% target. SARB has committed to deliver more hikes going forward.
However, I believe that the bank should now pause its hikes as it observes the trends on inflation. More hikes could significantly affect the country’s economic growth going forward. And there is evidence that taking a strategic pause is slowing inflation in other countries.
For example, Canada’s inflation has continued falling after the central bank decided to pause its hikes. The same is true in Turkey, where inflation has fallen from 90% to 44% without hikes.
The 4H chart shows that the USD dollar is about to pop against the South African rand. It has formed an inverted head and shoulders pattern, which is usually a bullish sign. The neckline of this pattern is at 18.54. The pair is also slightly above the 50-period moving average and the ascending trendline shown in blue.
Therefore, I believe that the USD/ZAR pair will continue rising as buyers target the next key resistance point at 18.60. A move below the right shoulder at 18.17 will invalidate the bullish view
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