The GBP/ZAR pair continued to decline as the South African rand found more buyers. The pair declined by more than 1% while the USD/ZAR declined by 90 basis points.
Why pound to rand is falling
The GBP/ZAR, which has risen by more than 24% this year, has been falling this week. The pair has managed to move from a YTD high of 23.6412 to the current 23.8615.
There are three primary reasons why the rand is strengthening. First, the GBPZAR was highly overbought when it was trading at a high of 23.6412. The RSI was at 80 on Friday. This level is considered highly overbought. Similarly, the Stochastic oscillator was in the overbought category on Friday.
Second, the South African government has unveiled a multibillion-dollar stimulus package. While most of these funds will be allocated in the budget, a substantial amount will be borrowed from the International Monetary Fund (IMF). As a result, as the funds come, there will be a surge in demand for the South African rand.
Finally, the government has announced plans to ease the current lockdown. This was made in a speech Ramaphosa made last week in parliament. The plan includes four levels of opening, with a number of crucial sectors set to be reopened this week. Therefore, there are signs that this decision will lead to more business activity in the country.
Obviously, the biggest risk is the probability of a secondary wave of infection now that the number of cases has started to decline. Data from Worldometer show that the number of new cases has declined to 203 from the high of 318 a week ago. In fact, a report by a media outlet said that the country was bracing itself for a new virus surge.
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GBP/ZAR technical outlook
On the daily chart below, we see that the RSI of the pound to rand pair reached a high of 80 on Friday last week. As it did this, the pair formed a double top candlestick pattern. The pair has also formed four consecutive bearish moves. Therefore, I expect the pair to decline and test the 23.6% Fibonacci retracement level at 22.0618 as bears attempt to take control.
On the flipside, a move above the YTD high of 23.6412 would invalidate this thesis because it would be an indicator that there are more buyers in the market.
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