USD/ZAR: Price forecast: SA inflation hits levels last seen in May 2022

USD/ZAR Fundamental backdrop

The South African rand has given up some of its gains against the US dollar this Wednesday after inflation (see economic calendar below) missed estimates on the lower end thus increasing dovish talk around the South African Reserve Bank’s (SARB) interest rate decision tomorrow. Headline inflation YoY hit 11-month lows (6.8%) but remains far off the SARB’s target range of 3% - 6%. Most items remained steady since March with only transport and residual items seeing a drop on a YoY basis. From a monthly perspective, the decline echoed the YoY print including the respective major contributors.

USD/ZAR Economic calendar

Large YoY increases remain in the following areas:

• Personal care (+11.6%)

• Books, newspapers and Stationery (+11.5%)

• Public transport (14.8%)

• Food (14.3%)

• Non-alcoholic beverages (10.4%)

A further breakdown of the both YoY and MoM emphasizes the large increases across food items that will negatively impact the lower to middle income households.

From a USD perspective, Emerging Market (EM) currencies have been hit by the ongoing US debt negotiations that seem to be driving market at present. The longer President Joe Biden and House Speaker Kevin McCarthy take to settle a deal, the more the safe haven appeal for the greenback will grip markets and expose the ZAR to further downside.

Later today, the FOMC minutes will come into focus alongside the Fed’s Waller to give us an indication of their thoughts in the most recent meeting. After Fed Chair Jerome Powell’s statement to potentially pause their hiking cycle, it will be interesting to see how this compares with the FOMC discussions. Bear in mind, some key US economic data is scheduled this week including US GDP, core PCE (Fed’s preferred measure of inflation), durable goods orders and Michigan consumer sentiment; and with data dependency gaining traction, these releases now carry more significance than usual.

TECHNICAL ANALYSIS

USD/ZAR DAILY CHART

Daily USD/ZAR price action now shows more fervent defense of the short-term trendline support (black) with a firm horizontal resistance around the 19.5000 psychological handle. This could be the formation of an ascending triangle pattern that traditionally aligns towards a bullish continuation. Rand bulls will be looking for a trendline support break that may invalidate the upside move and open up subsequent support one (19.0000). The Relative Strength Index (RSI) suggests fading bullish momentum giving hope to USD/ZAR bears while mean reversion supplements the downside bias. In summary, the pair remains at the mercy of fundamental macro factors that should provide sustained volatility throughout the week.

Resistance levels:

• 19.5000

• 19.3453

Support levels:

• Trendline support

• 19.0000

• 18.7167

• 18.5000