USD/ZAR: South African rand supercharged as the DXY index slips

Written by

Updated on Aug 14, 2024

Reading time 3 minutes

The USD to South African rand pair continued falling this week.
Data showed that the headline and core inflation dropped in June.
The South African rand will likely continue gaining in the coming days.

The USD/ZAR exchange rate slipped to the lowest level since April 5th as the South African rand comeback continued. The pair dropped below 18, ~10% below the highest level this year. Similarly, the EUR/ZAR and GBP/ZAR have also retreated.

South African rand rally continues

The USD to rand rate dropped after the latest South Africa consumer inflation data. According to South Africa’s statistics agency, the headline consumer price index (CPI) dropped to 0.2% in June, lower than the median estimate of 0.4%. This decline translated to an annual inflation of 5.4%.

Core consumer inflation, which excludes the volatile food and energy prices, rose from 0.4% in May to 0.4% in June. It rose by 5.0% on a YoY basis, lower than the expected 5.1%. These numbers mean that South Africa’s inflation is falling at a faster pace than expected.

Annual #CPI inflation retreated to its lowest level in 20 months, cooling to 5,4% in June from 6,3% in May.

Listen here for more: https://t.co/d0qCjTklXk #StatsSA #Inflation pic.twitter.com/099JRlkEiA
— Stats SA (@StatsSA) July 19, 2023

Inflation has been helped by the stronger South African rand, which has made imports like oil and gas cheaper. Therefore, with inflation falling to the central bank’s target, analysts expect that it will now hold interest rates unchanged for a while. It hiked rates to 8.25% in June.

The USD/ZAR retreat has been accompanied by the decline of the US dollar index (DXY). The index, which measures the dollar’s strength against a basket of currencies, has retreated below $100.

Recent data showed that America’s inflation has dropped in the past few months. The headline CPI dropped to 3.0% while the labour market has stabilised. Retail sales and manufacturing production dropped in June.

Therefore, there is a likelihood that the Fed will hike rates by 0.25% in July and then take a strategic pause for a while.

USD/ZAR forecast

USDZAR chart by TradingView

I correctly predicted the South African rand comeback, as you can read here. Now, on the daily chart, we see that the USD/ZAR pair has dropped below the support level of 18.58 (October 22nd and March 9 high). It has also moved below the 100-day and 50-day exponential moving averages and the support at 18.12.

The pair also formed a head and shoulders pattern, which is usually a bearish sign. Therefore, the outlook of the USDZAR price is bearish, with the next support level being at 17.50 followed by 17.