Pound to rise on better than expected YoY CPI data

The surprise outcome of the Brexit referendum enabled even the currencies of fragile economies to strengthen against the Pound. The South African Rand comes under that category.

The GBP/ZAR pair declined for nearly five weeks in a row, thereby making Rand one of the best performing currencies in the post Brexit scenario.

However, the currency of an economy cannot have a piggy back ride on the weakness of another currency. Only when an economy is really strong, the respective currency of a country can sustain its uptrend.

The South African economy is struggling and it can ill afford a strong Rand. The GBP/ZAR pair, which declined to 17.0443 earlier this week, is now indicating a firm reversal as explained below.

A series of economic data were announced by the UK Office for National Statistics and all of them indicate that the economy is faring well in spite of the negative sentiment created by the outcome of the Brexit referendum. In July, the consumer price inflation (CPI) rose 0.6% on a y-o-y basis. It was a notch higher than the analysts’ expectation of 0.5%. Similarly, the core CPI grew 1.3% on a y-o-y basis and met the analysts’ estimates. Another important economic data, the PPI (Producer Price Inflation) input,jumped 3.3% on a m-o- m basis in July and exceeded the analysts’ expectation of 0.6%. Similarly, the PPI output gained 0.3% and met the analysts’ estimates.

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On the other hand, the unemployment rate of South Africa stood at a whopping 26.6% in the quarter ended June 2016. Similarly, in the first-quarter of 2016, the economy contracted by 1.2% (annualized basis), against the market’s expectation of a 0.1% decline. Thus, fundamentally, we forecast a rise of the GBP/ZAR pair soon.

Both RSI and Stochastic indicator are rising above the bearish zone, thereby indicating a reversal in the trend. The GBP/ZAR pair has also found support at 17.21 levels. The next major resistance exists at 17.88, which is also the 50% Fibonacci retracement level for the fall from 18.7414 to 17.0443. So, we can anticipate the cross to rise at least till the 17.88 level.

To benefit from the forecasted uptrend, a Forex trader can take a long position at 17.20 levels in the GBP/ZAR pair. A stop loss order can be maintained below 17.04. The profit for the long position can be booked near 17.80.

Likewise, a binary trader can think of purchasing a one touch call option to generate profit. The investment can be made as long as the contract valid extends until the third week of September. Furthermore, the binary broker should offer a target price of about 17.60 for the suggested call option trade.

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