SARB Interest Rate Hike Prompts Euro South African Rand (EUR/ZAR) Exchange Rate Slump
After the South African Reserve Bank (SARB) opted to raise interest rates at its November policy meeting the South African Rand (ZAR) surged higher across the board.
This move caught some investors off guard, given the mixed nature of October’s South African inflation data.
However, in spite of the weaker core inflation reading, SARB policymakers voted for another 25bpt interest rate hike.
Even though it emerged that the ultimate decision was split, with 4-3 in favour of the rate hike, this was not enough to prevent further ZAR exchange rate gains over the course of the afternoon.
As the SARB continued its mission to bring down inflation the Euro to South African Rand (EUR/ZAR) exchange rate slumped more than -1% on Thursday’s opening level.
While worries remain over the underlying health and resilience of the South African economy these were temporarily overshadowed by the SARB’s monetary tightening move.
Diminished Eurozone Consumer Confidence Weighs on Euro (EUR)
Demand for the Euro (EUR), meanwhile, diminished in the wake of a weaker-than-expected Eurozone consumer confidence index reading.
As the index dipped from -2.7 to -3.9 in November this gave investors fresh incentive to sell out of the single currency, with weaker consumer confidence pointing towards weaker economic growth.
If the economy continues to lose momentum in the fourth quarter this could weigh heavily on EUR exchange rates, as weaker growth increases the case for the European Central Bank (ECB) to maintain looser monetary policy.
The Euro also failed to find any support on the back of October’s ECB meeting minutes, which did not demonstrate any increased sense of hawkishness.
As Tim Riddell, research analyst at Westpac, commented:
‘Core inflation may be stable, but it persistently fails to display any upside pressures, despite expectations from ECB for this to develop. 2019 may now revert to the low trend growth and inflation that were evident prior to 2017.’
Weaker Eurozone PMIs Forecast to Drag EUR/ZAR Exchange Rate Lower
The EUR/ZAR exchange rate could lose further ground ahead of the weekend if November’s Eurozone manufacturing and services PMIs prove disappointing.
Forecasts point towards a modest easing in growth momentum on the month, something which investors are unlikely to greet.
As long as the manufacturing and services sectors show signs of a slowdown the mood towards the Euro is likely to sour further.
On the other hand, evidence of greater resilience within the Eurozone economy could encourage EUR exchange rates to rally on Friday.
A stronger showing from the German economy in particular may give the Euro a boost, given recent signs that the Eurozone’s powerhouse economy is feeling the pressure from global trade tensions.
If market risk appetite continues to deteriorate, meanwhile, this could help the EUR/ZAR exchange rate strengthen as the appeal of the Rand diminishes.
