USD/ZAR: top catalysts for the South African rand this week

The South African rand is firing on all cylinders this year. The USD/ZAR exchange rate plunged to a low of 17.35, its lowest level since November last year, down by almost 13% from the highest point this year. This article explores the top catalysts that will drive the rand this week.

South Africa inflation data

The first main catalyst for the USD/ZAR exchange rate will be the upcoming South African consumer inflation report set for Wednesday this week.

Economists polled by Reuters expect the data to show that the headline Consumer Price Index slowed from 0.9% in July to 0.4% in August. This, in turn, is set to move from 3.5% to 3.4% on an annualized basis.

Core inflation, which excludes the volatile food and energy prices, is expected to slow from 0.4% to 0.2%, translating to an annualized drop from 3% to 2.9%.

If these numbers are accurate, they mean that the country’s inflation is moving in the right direction and is inside the central bank’s target range.

One main reason for the inflation drop is that the South African rand has rebounded, making it cheaper for the country to import key products like crude oil and gas.

South African Reserve Bank interest rate decision 

The other main catalyst for the USD/ZAR exchange rate this week will be the upcoming South African Reserve Bank (SARB) interest rate decision scheduled on Thursday.

This will be a notable decision as it comes after the bank tweaked its inflation target, a decision that irked top government officials. The bank shifted the inflation target from between 3% and 6%, with the main figure being the midpoint at 4.5% to 3%. 

Economists expect the bank to leave interest rates unchanged at 7% and the prime overdraft rate at 10.5%. However, if the inflation report shows that prices are falling, it is likely that the bank may decide to cut interest rates.

SARB has been cutting interest rates aggressively in the past few months as it adjusted to the new normal with Washington, which has added substantial tariffs on the country. It lowered interest rates from 8.25% last year to 7% today.

Federal Reserve interest rate decision 

The other notable catalyst for the USD/ZAR pair will come from the United States, where the Federal Reserve will start cutting interest rates in its meeting on Wednesday.

Economists polled by Reuters expect the bank to slash interest rates by 0.25% as it works to prevent more losses in the labor market.

With the interest rate now priced in, market participants will watch the language of the top officials for hints on what to expect in the next few meetings. Economists already expect the bank to cut rates at least two more times this year. A rate cut will boost gold price, which positively impacts the rand.

USD/ZAR to react to technicals

The other main catalyst for the pair is its technicals. This chart shows that the pair has plunged from a high of 19.93 in January to 17.38. Most recently, it plunged below the important support level at 17.48, its lowest level on July 3. This price was also the neckline of the head-and-shoulders pattern.

The pair has remained below all moving averages after it formed a death cross pattern in May this year. Also, the Relative Strength Index and other oscillators have continued falling.

Therefore, the pair will likely continue falling as sellers target the next important support level at 17, its lowest level in 2024.