USD/ZAR forecast: falling wedge points to a South African rand pullback

The USD/ZAR exchange rate rose by a few pips today, July 9, as crude oil prices rose following the new strikes in the Middle East. It jumped to 16.50 on Wednesday and then pulled back a bit to 16.37. 

South African rand falls as geopolitical tensions rise

The South African rand softened a bit after the US and Iran restarted their strikes, with President Donald Trump declaring the truce over. As a result, crude oil prices jumped as investors anticipated more traffic disruptions at the Strait of Hormuz.

This disruption will happen at a time when inventories in the US and other countries remain at dangerously low levels. Indeed, Trump noted that worries in the oil market were one of the reasons why he decided to reach a one-sided deal with Iran. 

Rising oil prices will make the South African inflation situation worse and push the central bank to intervene. The most recent data showed that the headline CPI jumped 4.5% in may from 3% in February. It has remained above the central bank’s target level since March this year.

In a statement at the European Central Bank (ECB) forum in Portugal, the head of South Africa’s central bank hinted that the bank may be forced to hike interest rates later this year. The bank has already hiked rates to 7% this year, with market participants expecting at least one more.

The South African rand has also struggled because of the ongoing developments in the metals industry. Gold, a key South African export, has plunged to $4,080, down by 27% from its highest point this year. Platinum and palladium prices have also pulled back.

Federal Reserve may hike rates this year

Meanwhile, there are signs that the Federal Reserve will hike interest rates this year. Fed minutes released on Wednesday showed that the committee entertained different scenarios in the last meeting. 

Some members supported a view where the bank started cutting rates later this year, contigent on falling inflation. Others, however, supported hiking rates later, citing the elevated inflation, which has remained above the 2% target for a while.

Fed and SARB policies have an impact on the USD/ZAR pair because of the carry trade situation. The rand normally attracts more demand whenever the SARB is hiking rates as that makes it more attractive. 

Looking ahead, the next main catalyst for the USD/ZAR pair will be the upcoming US inflation report coming out next week.

USD/ZAR technical analysis

USDZAR chart | Source: TradingView

The daily chart shows that the USD/ZAR pair has come under pressure in the past few months. It has dropped from a high of 17.25 on March 23rd to the current 16.35. 

The pair is now consolidating at the 25-day and 50-day Exponential Moving Averages (EMA). It also formed a falling wedge pattern, which is made up of two descending and converging trendlines. 

This wedge pattern normally leads to a strong bullish breakout. If this happens, the next level to watch will be the psychological point of 17. A drop below the lower side of the wedge will point to more downside.