GBP / ZAR volatile amid Omicron uncertainty
The South African Rand pound (GBP / ZAR) exchange rate lost ground this week as the UK introduced new restrictions to combat the spread of the Omicron variant.
The pair has seen volatility, however, as the new strain of coronavirus continues to create uncertainty and trigger sharp reversals in risk sentiment.
British pound (GBP) tumbles on new UK Covid restrictions
The British pound (GBP) initially strengthened against the South African Rand (ZAR) earlier in the week following a better-than-expected UK construction PMI as construction activity unexpectedly increased last month.
However, some comments from Bank of England (BoE) policymaker Ben Broadbent saw the pound slip into the red on Monday afternoon.
Broadbent’s comments initially seemed hawkish, as he predicted inflation would rise next year:
âThe headline inflation rate is expected to rise further over the next few months and is likely to comfortably exceed 5% when Ofgem’s cap on retail energy prices is adjusted next, in April. “
But the rate regulator has also expressed concern about the UK’s financial situation, saying it was an “extremely difficult time for monetary policy” with soaring UK inflation. but the economic recovery seems uncertain. Following conciliatory comments from other BoE officials, Broadbent’s remarks scared sterling investors.
Covid concerns also weighed on Sterling from the start of the week, with Health Secretary Sajid Javid announcing on Monday that there was “community transmission of the Omicron coronavirus variant” in England. Javid added that he could not promise that the new variant “will not take us off the road to recovery”.
Infections in the UK continued to rise, putting pressure on the pound sterling throughout the first part of the week, and leading to reports that the UK government is implementing its coronavirus plan B. As a result, the pound fell to a three-week low against the rand and remained demolished after the UK confirmed its intention to introduce new Covid restrictions.
The rand rate managed to firm up on Thursday as sterling investors bought lower, giving the pound a boost in the face of a weakened rand.
The pound fell again on Friday as UK GDP missed forecasts, edging down to just 0.1% in October and raising concerns about the resilience of the UK economy.
South African Rand (ZAR) gains ground as Omicron fears easing
Meanwhile, the risk-sensitive South African rand gained ground throughout the first part of the week as risk appetite steadily improved.
Global markets have become increasingly less worried about the Omicron variant amid reassuring remarks from physicians in the field and medical professionals. Not only did this help improve risk appetite, thus supporting the Rand, but it also allayed fears about the impact the new variant could have in South Africa, where it was first discovered. time.
The first reports from hospitals in South Africa suggest that the Omicron variant causes much milder symptoms than the Alpha and Delta variants. Data from the country’s Gauteng province shows that only 8% of Covid patients are treated in intensive care, up from 23% during the Delta wave. In addition, only 2% are on ventilators, compared to 11%.
This news was of course generally well received, but ZAR investors were particularly relieved. Shabir Madhi, professor of vaccinology at the University of the Witwatersrand in Johannesburg, said he was “extremely optimistic”. Meanwhile, Anthony Fauci – the White House’s chief medical adviser – said the early signals were “encouraging.”
The rise came despite South Africa’s GDP growth rate for the third quarter of this year, which contracted 1.5%, worse than economists’ expectations of a drop of 1.2 %.
New optimism has come following an announcement from US drugmaker Pfizer and its German partner BioNTech. The companies said initial lab tests showed that a three-shot course of their vaccine was enough to “neutralize” the Omicron variant.
Ugur Sahin, CEO of BioNTech, said:
âOur first preliminary data set indicates that a third dose could still provide a sufficient level of protection against diseases of any severity caused by the Omicron variant …
“We continue to work on a suitable vaccine which we believe will help induce a high level of protection against Omicron-induced Covid-19 disease as well as prolonged protection compared to the current vaccine.”
However, the sense of risk started to change towards the end of the week. The UK’s decision to reintroduce certain Covid restrictions has worried global markets, bursting Omicron’s bubble of optimism.
Geopolitical tensions between the United States and its two biggest rivals – China and Russia – have also rocked market sentiment. In addition, Chinese real estate giant Evergrande, which has been on the verge of collapse for months, has seen its rating downgraded to ânarrow defaultâ by rating agency Fitch.
On Friday, ZAR managed to zigzag higher against the British pound, making some final gains before the end of the week.
GBP / ZAR exchange rate forecast: the interest rate decision causing volatility
The most important events for the GBP / ZAR next week will be the interest rate decisions of central banks, in particular the Federal Reserve. If the Fed decides to speed up its reduction process, the US dollar (USD) could soar. This would likely distract investors from emerging market currencies like the rand.
However, the latest figure for South Africa’s inflation rate could give the rand a boost. Consensus estimates predict that inflation will drop from 5% to 5.4%.
For the British pound, there are plenty of high impact data releases this week, including the UK CPI and the latest jobs figures. However, the BoE’s decision will likely be the focus of concerns, especially with regard to the GBP / ZAR. If the bank leaves rates unchanged, as the markets expect, the GBP / ZAR could fall.