The USD/ZAR has started the week on a solid footing, gaining 0.38% as bets on a potential rate hike by the Fed next week gather momentum. This sentiment comes at the expense of emerging market currencies such as the Rand, usually on the receiving end of investment outflows towards US-denominated assets when rates go up.
The pair will face fundamental challenges to the dollar’s dominance but from the South African end. This week will feature critical inflation data from South Africa and the interest rate decision by the South African Reserve Bank (SARB).
On Wednesday, 20 July, the core CPI data will be released. The core Consumer Price Index for June 2022 is expected to rise from 4.1% to 4.2% (annualized), and from 0.2% to 0.4% monthly. This data set will be followed on Thursday by the SARB decision, with the markets expecting a 50bps rate hike to 5.25%.
Traders are to watch out for these critical events in deciding their playbook for the USD/ZAR heading into next week’s big Fed decision.
The 4-hour chart shown here is a breakdown of the greenback’s current playbook in the context of a renewal of the uptrend following the retracement from the 1.21925-17.30934 supply zone.
The double shadows formed a double top, with the 17.13200 price level serving as the neckline that was breached to complete the retracement to the 61.8% Fibonacci extension from the 13 July to 14 July price swing. The bounce from the 16.98867 support formed a hammer, with the current 4-hour candle forming a bullish outside day candle that has 17.21925 as its primary target. A break of this level requires a clearance of the supply zone’s ceiling at 17.30000 to aim for the 27% extension at 17.42904. 17.51252 is the potential pitstop before the 17.58332 price mark (61.8% Fibonacci extension) becomes the new upside target.
Conversely, a breakdown of the 16.98867 and 16.86383 support levels negates the bullish outlook. This scenario sees 16.66620 become the new target to the south (7 July low), while 16.59586 waits in the winds as another downside target if there is further price deterioration.