Pound To Rand: Cup and Handle Points To Pullback Before Eventual Rally

USDZAR
USDZAR

The pound to rand (GBPZAR) pair rallied as more problems started to emerge in the South African economy. Over the weekend, the number of coronavirus infections rose to more than 3,000. Deaths rose to more than 50 people.

South African Airlines Bankruptcy

The biggest news from South Africa was that the South African Airlines had decided to lay-off its 4,500 employees. This happened after the government said that it won’t provide more finances to the flagship carrier as we had reported before.

The airline has been going through challenges in the past six years because of increased competition and mismanagement. These problems have seen it increase it make more than $1.4 billion in losses. As a result, it has relied on government bailouts for survival. The country is going through the same problem with Eskom, its monopoly power company.

In making the announcement, the company appointed a team of administrators that will help in restructuring. This will include selling of aircrafts and its two prime operating slots at London Heathrow Airport.

South African Airlines is not the only airline in trouble. In fact, all airlines are now struggling to stay afloat. In the United States, airlines like United Airlines, American, and Delta have received billions of dollars from the government. In a report released earlier today, Bloomberg said that the bug four airlines are considering cutting more than 100k jobs later this year.

South African Government Plans Wealth Tax

In a report by Bloomberg, South African government is considering having a wealth tax to help pay for the current crisis. The proposal has been suggested by a team of economists working at the treasury. Such a tax would likely see capital flight from the South African economy as the wealthy shifts it to overseas safe havens. There are also questions on whether such a tax would work in a country that has some of the highest tax rates in the emerging markets.

On a positive sign, while the number of coronavirus cases has remained being high, there are signs that the curve is flattening. In fact, the government has said that it plans to restart about 50% of its mining capacity in the next few days.

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Pound to Rand Technical Analysis

The GBPZAR pair has been on an upward trend this year. Looking at the daily chart, the price struggled to drop below the 23.6% Fibonacci Retracement level of 22.2335 on April 9. Since then, the price has formed a cup pattern and is finding significant resistance near the YTD high of 23.6515.

Therefore, I expect the pair to complete the cup and handle pattern by moving lower and possibly testing the important support line of 23.000.

The alternative case is where the pair breaks past the YTD high and moves up to above 24.00.

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