South African rand at risk ahead of SARB decision

The South African rand is hovering near its lowest level since December ahead of the upcoming interest rate decision by SARB. The USD/ZAR pair is trading at 16.027, which is about 11% above the lowest point in April. 

SARB decision

The South African Reserve Bank will conclude its two-day meeting on Thursday and possibly deliver another rate hike. Economists polled by Reuters expect that the bank will hike interest rates by 50 basis points in a bid to fight the soaring inflation.

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If economists are accurate, this will be the fourth interest rate hike since the bank started the current cycle. It will also be the biggest rate increase that the bank has implemented in years. If the rate hike cycle continues, interest rates will end the year at about 5.06%.

The ongoing rate hikes are necessary because the country’s inflation has surged in the past few months. According to the statistics agency, annual inflation jumped to 5.9% in April. This increase was slightly below the SARB’s upper band target of between 3% and 6%.

The USD/ZAR pair is reacting to the increasingly hawkish tone by the Federal Reserve. In a statement on Tuesday, Jerome Powell warned that the bank will not come to the market’s rescue like it did in 2018. Therefore, expectations are that the bank will hike interest rates by 0.50% in June and July and then shift to 0.25% hikes. 

A hawkish Fed is increasingly dangerous for the South African and other emerging market economies because of their high debt load. This means that they will have to pay more money. However, South Africa is being supported by the vast amount of goods it exports. Indeed, the country’s trade surplus widened to 45.86 billion ZAR in March.

USD/ZAR price forecast

The four-hour chart shows that the USD/ZAR pair has been in an upward trend in the past few weeks. The rise increased when the pair crossed the upper side of the descending channel pattern shown in purple. Now, the pair is still above the 50-day moving average while the Money Flow Index (MFI) and the Relative Strength Index (RSI) are pointing downwards.

The pair has also found a strong resistance at 16.2856, which was the highest level on November 26th. Therefore, at this stage, the outlook for the pair is neutral ahead of the SARB decision. A move above the resistance at 16.28 will signal that bulls have prevailed and push it higher. A drop below the support at 15.45 will be a sign that there are bears in the market.

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