USD/ZAR: South African rand sits at key level after hawkish Fed

The South African rand has remained on edge as emerging market currencies slumped after the hawkish Federal Reserve interest rate decision. The USD/ZAR exchange rate rose to a high of 18.35, its highest level since in November. It has risen by 7.3% from its lowest point in October this year.

Hawkish Fed slams emerging market currencies

The USD/ZAR pair has rebounded in the past few weeks after the relatively hawkish Federal Reserve slumped emerging market currencies. For example, the Brazilian real and the Indian rupee have all crashed to a record low this year. 

This performance is because the Fed has largely embraced a higher-for-longer monetary policy approach. In its last meeting of the year, the bank decided to slash interest rates by 0.25% as was widely expected.

The bank also hinted that it would deliver fewer rate cuts than it had previously guided. Instead, officials pointed to just two interest rate cuts in 2025 as they remained concerned about the incoming administration.

Donald Trump has made many policy pledges, most of which will be inflationary. He has hinted that he will cut taxes, deport millions of illegal migrants, and impose tariffs in a bid to lower the large trade deficit.

These policies will likely lead to higher inflation. Tariffs will be passed to American consumers, who will now start paying much more for products. That’s because the US would need substantially higher tariffs to encourage companies to start building in the country.

Deporting illegal migrants will largely be inflationary because these people work in key industries like agriculture and construction. Without enough workers, companies will need to hike wages and prices.

A more hawkish Fed means that emerging market countries like South Africa that have higher exposue to US dollar debt will pay more. That’s because the cost of borrowing in the US has continued rising, with the 30-year and 10-year yields rising to over 4%.

South African interest rates

The USD/ZAR pair also reacted to the political issues in South Africa, where there are risks that the political union between the ANC and the Democratic Alliance will not work out in the long term.

The DA Party has warned Ramaphosa against firing its ministers. These uncertainties are having an impact on the economy. Data released this week showed that a gauge measuring the level of confidence in government policy pointed to uncertainty. 

A recent report showed that the economic recovery was still taking time. The economy contracted by 0.3% in the third quarter as the agricultural sector worsened. It expanded by 0.4% in the first nine months of the year, lower than the expected 1.1%.

The South African Reserve Bank has started to slash interest rates in a bid to boost the economy. It slashed rates by 0.25% in the last meeting in November, bringing the prime rate to 11.25%. It also cut the prime rate by 0.25% to 7.75%.

USD/ZAR technical analysis

The daily chart shows that the USD to ZAR exchange rate has risen in the past few weeks. It has jumped from the year-to-date low of 17 to the current 18.35. The pair is hovering at a key resistance since this price was the highest swing on November 13.

It has moved above the 50-day and 25-day Exponential Moving Averages. Most importantly, it has showed signs of forming a double-top chart pattern, a popular bearish reversal sign whose neckline is at 17.61.

Therefore, the path of the least resistance for the pair is bullish, with the next point to watch being at 18.70, the highest swing on August 2