The USD/ZAR exchange rate will be in the spotlight as the South African Reserve Bank (SARB) delivers its interest rate decision on Wednesday. This decision comes a week after the Federal Reserve hiked rates and signaled that it will hike again this year. It was trading at 16.23, a few points below last week’s high of 16.41.
SARB interest rate decision
The main USD/ZAR news this week will be from South Africa, where the statistics agency will publish the closely watched inflation report and the central bank will deliver its monetary policy decision.
Economists expect the report to show that South Africa’s inflation remained elevated in August as energy prices jumped. The average estimate among analysts is that the headline CPI rose from 4.3% in July to 4.5% in August. Core inflation, which excludes the volatile food and energy products, is expected to remain at 4.2%.
These figures are above the SARB’s 3% target, so the bank may hike interest rates by 0.25%. If this happens, it will be the second time that the SARB has hiked interest rates this year. In its last meeting, it caught investors off guard by leaving rates unchanged at 7%. Many analysts were expecting the bank to hike.
South Africa’s inflation is a big challenge because of the rising petrol and diesel prices because of the worsening situation in the Middle East. Tensions between the US and Iran have continued to rise, while Saudi Arabia and Houthis have launched some major attacks.
Federal Reserve hiked rates last week
The SARB decision comes exactly a week after Kevin Warsh and his team at the Federal Reserve delivered their rate decision. As most analysts were expecting, the bank decided to hike interest rates by 0.25%.
Most importantly, Warsh signaled that the bank will hike interest rates again later this year. Economists now predict that the hike will happen in the December meeting.
The Fed hike is important for the USD/ZAR pair because of the carry trade that has existed for a while. A carry trade is a situation where investors borrow a low-interest-rate currency and then invest a high-yielding one.
In this case, the spread between the US and South African rates widened last week, but will go back to where it was if SARB decides to hike interest rates.
USD/ZAR technical analysis
USDZAR chart | Source: TradingView
The four-hour chart shows that the USD/ZAR pair has been in an upward trend in the past few months. It formed a double-bottom pattern at 15.92 and a neckline at 16.20. A double-bottom is a common bullish reversal pattern in technical analysis.
The pair is now attempting to retest the pattern’s neckline. Such a move is known as a break-and-retest and is one of the most common bullish continuation patterns in technical analysis.
The pair sits slightly above the 50-period Exponential Moving Average (EMA) and the Supertrend indicator. These technicals suggest that the pair may resume the uptrend, potentially to this month’s high of 16.41.
On the flip side, the pair has also formed what looks like a head-and-shoulders pattern, which, in this case, may lead to more downside.
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