USD/ZAR: Is the strong South African rand rally coming to an end?

on May 19, 2021
  • The USD/ZAR is trading at the lowest level since January last year.
  • The pair declined after the strong South African inflation data.
  • It has formed a falling wedge pattern, which is a sign of a possible reversal.

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The USD/ZAR pair is hovering near the lowest level since January 2020 after the surprise increase of South Africa’s consumer inflation. The pair is trading at 14.04, which is more than 28% below the highest level in March last year.

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South African rand
South African rand chart

South Africa inflation

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The South African rand rallied against the US dollar after the country published the latest inflation numbers. According to the bureau of statistics, the headline consumer price index rose by 0.7% on a month-on-month basis in April. This increase was better than the median estimate of 0.5%. It led to a year-on-year increase of 4.4%, which was substantially higher than the previous increase of 3.2%. 

The core consumer inflation rose by 0.3% in April after rising by 0.5% in the previous month. As a result, this led to an annualised increase of 3.0%. Analysts polled by Reuters were expecting the core CPI figure to rise by 2.8%. 

These numbers reflect the recent surge in crude oil and other commodity prices. Indeed, the price of crude oil has more than doubled in the past 12 months. The same is true with the Bloomberg Commodity Index that is hovering near its all-time high.

Therefore, the USD/ZAR retreated because investors are now pricing in a situation where the South African Reserve Bank (SARB) starts hiking interest rates. Furthermore, other emerging market currencies like those in Turkey, Brazil, amd Russia have already started tightening.

In addition to South Africa, other countries are also seeing robust consumer prices. Today, data by the Office of National Statistics (ONS) showed that the UK consumer inflation doubled to 1.5% in April. Last week, data by the United States showed that the CPI rose by 4.2%. 

USD/ZAR technical analysis

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GBP/USD technical chart

The daily chart shows that the USD/ZAR pair declined to a low of 13.98 today. The pair is still below the 25-day and 50-day exponential moving averages (EMA). Most notably, the chart shows that the pair has formed a falling wedge pattern. In technical analysis, this is usually a sign of a reversal. Therefore, while the overall bearish trend may continue, a reversal may start soon. However, a strong drop below the support at 13.93 will invalidate this prediction.


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