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EUR ZAR Exchange Rate Hits 18-Month Low, But Can the Euro Recover Following Upbeat Data?

The Euro South African Rand (EUR ZAR) exchange rate plummeted to an 18-month low at the start of today’s session but began to mount a recovery by mid-morning as recent PMI data impressed.

Data compiled by IHS Markit reported that Germany’s manufacturing sector performed better than expected in March as the latest PMI figures rocketed from 56.8 to 58.3, easily beating predictions that growth would slow to 56.5.

Germany’s Services PMI also beat expectations this month with activity climbing from 54.4 to 55.6 and outpacing forecasts it would only rise to 54.6.

EUR investors were particularly pleased by forecasts from analysts that they expect the strong start to the year will lead to solid first quarter growth in 2017.

Trevor Balchin, senior economist at IHS Markit said;

‘The March flash PMI results rounded off a strong first quarter for the Germany economy, which enters the spring growing at the fastest rate in nearly six years. The PMI data strongly suggest that economic growth will accelerate in the first quarter.’

The jump in Germany’s PMI also reflected well in the overall Eurozone print as Markit reported that the Eurozone’s manufacturing and services PMI rose from 55.4 to 56.2 and 55.5 to 56.4 respectively.

However observers suggested that while the output index showed strong growth is was unlikely to be enough to prompt the European Central Bank (ECB) to revise its monetary policy.

Stephen Brown, European economist at Capital Economics said;

‘There is still slack in the labour market and wage growth is set to remain subdued. As such, policymakers at the European Central Bank are unlikely to be convinced that recent signs of a pick-up in activity will translate into sustained upward pressure on inflation.’

Meanwhile a recent uptick in domestic data allowed the South African Rand to exploit the weakness in the Euro ahead of the UK’s potentially disruptive split from the European Union.

On Wednesday, Statistics South Africa (StatsSA) reported that inflation eased from 6.6% to 6.3% in February, with the second consecutive drop leading to speculation that consumer spending will rise in Q1.

ZAR investors were also impressed by the narrowing of the current account deficit as the government reported its lowest account gap in nearly six years.

The Rand was also strengthened by increased market risk appetite as the pause in the US Dollar (USD) ahead of the key vote on Trump’s healthcare bill has prompted investors to look for alternative currencies to trade in.

Looking ahead the EUR ZAR exchange rate may strengthen at the start of next week’s session as the Ifo is expected to report that German Business Confidence remained steady in March despite political uncertainty over the upcoming French election.

Meanwhile the South African Rand may slow as the South African Reserve Bank (SARB) is forecast to leave interest rates unchanged at 7% following the recent drop in the inflation rate.

Current Interbank Exchange Rates

At the time of writing the EUR ZAR exchange rate was trending around 13.48 and the ZAR EUR exchange rate was trending around 0.07.