The USD/ZAR exchange rate has been a bit ugly in the past few weeks as investors look for direction ahead of the Federal Reserve interest rate decision. The pair was trading at 18.35 on Tuesday, 2.70% above its lowest point this year and 5.35% below its highest point this year.
Federal Reserve decision ahead
The USD to ZAR exchange rate will be in the spotlight this week as investors focus on key US economic data and Federal Reserve action.
The first set of key data will come out on Tuesday when the US publishes the latest consumer confidence and JOLTs jobs data.
Economists polled by Reuters expect the data to show that consumer confidence retreated from 100.4 in June to 99.7 in July. If this prediction is correct, it means that confidence dropped to its lowest point in months.
Consumer confidence is an important number because consumer spending is the biggest part of the American economy and highly confident consumers spend more money and vice versa.
The Bureau of Labor Statistics (BLS) will also publish the latest job openings numbers for June. Economists expect that the labor market continued softening in June, with the number of openings falling from 8.14 million to 8.02 million.
These numbers will come a few days after the US published strong GDP data and encouraging personal consumption expenditure (PCE) inflation data. According to the BEA, the economy expanded by 2.6% in the second quarter, a strong recovery since it grew by just 1.3% in the first quarter.
PCE, the Fed’s favourite inflation gauge, also continued falling in June as they neared the Fed’s target of 2.0%.
Looking ahead, ADP will release its estimate of the July private payroll data. Economists expect the data to show that the private sector created 166,000 jobs in July, higher than the 150,000 it created in the previous month.
The other important USD/ZAR event will be the Federal Reserve interest rate decision. Economists are unanimous in that the Fed will not cut or hike interest rates in this meeting.
Instead, the bank will leave rates unchanged between 5.25% and 5.50%. It will then hint that it will cut rates in September. A Goldman Sachs analyst estimates that the Fed will not give this hint in this meeting. Instead, it will wait for July’s inflation data and provide the hint at the Jackson Hole Symposium.
Watch here: https://www.youtube.com/embed/XdHxB0eBm5s?feature=oembed
The Fed is concerned about the state of the American labor market where the unemployment rate. On Friday, the NFP data will confirm whether the unemployment rate continued rising in July. In theory, the USD/ZAR pair should drop if the Fed confirms the dovish bias.
South African interest rates
Meanwhile, the South African Reserve Bank (SARB) has hinted that it will maintain higher rates for longer.
It has maintained steady interest rates at 8.25% in the past eight consecutive meetings. In its statements, the bank has insisted that inflation remains stubbornly high.
Nonetheless, analysts expect the bank to start cutting after the Fed makes its move. Besides, recent data showed that the country’s inflation has dropped to 5.1% from the post-pandemic peak of 7.8%.
Also, some SARB’s officials have been open to start cutting interest rates. In the recent meeting, two members voted to slash rates by 25 basis points.
In a statement on Tuesday, the central bank governor hinted that inflation will end the year at 4.9%, helped by food and fuel prices. He said:
“Even with some quantitative and qualitative adjustments to risk perceptions over time, the Monetary Policy Committee (MPC) has felt it appropriate to maintain the repurchase (repo) rate at 8.25% – a level set in May of 2023.”
The actions by the Federal Reserve and the SARB have a major impact on the USD/ZAR. In this case, if the Fed starts cutting rates, it will see many American investors move to riskier places like South Africa, a move that will help the rand.
USD/ZAR technical analysis
USD/ZAR chart by TradingView
On the daily chart, we see that the USD to ZAR exchange rate has been in a bearish trend after peaking at 19.92 in June 2023. It has dropped below key support levels at 19.0 and the psychological points at 18.50.
The pair is consolidating at the 50-day 100-day Exponential Moving Averages (EMA). It is also slightly above the key support level at 18.10, its lowest swing since December last year.
Therefore, the pair will likely remain in this range this week. If this happens, the key support and resistance point to watch will be at 18.10 and 18.60. A drop below 18.10 will point to more downside.
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