Rand benefits from softer dollar after US CPI inflation data
US CPI inflation data has prompted a less hawkish outlook to weaken the dollar which is benefitting the rand
US Dollar (USD) softens after CPI Inflation data
The US dollar has softened after Consumer Price Index (CPI) data showed that the rate of inflation (year on year) had slowed to 8.5% in July 2022 from 9.1% in the month preceding. US CPI growth between June and July was flat (+0%), the first month on month reading whereby inflation had not increased since November 2020.
While the figure marked a slight easing in US inflation, the figure does however remain extremely high. Energy prices soared 32.9% year on year (y/y) with electricity prices marking their largest increase (15.2%) in more than fifteen years. Food costs increased by 10.9% the largest y/y increase seen in more than four decades.
Core inflation, which omits energy and food related costs, was firm at 5.9% y/y, slightly better than consensus which had predicted a 6.1% increase in July 2022.
Hawkish rate hike expectations wane
While CPI data is not the Federal Reserves primary indicator towards inflation (Personal Consumption Expenditure is), expectations around the size of the central banks next rate hike have eased following the news. According to the CME Fedwatch Tool, there is now a 60% probability of a 50 basis point hike at the next Federal Open Market Committee (FOMC) meeting. Previously (9 August) the Fedwatch Tool had suggested a 68% probability of a 75 basis point hike at the next meeting.
The rand a short term beneficiary of the softer dollar
The weaker dollar has lifted a broad-basket of currencies including the rand. The rand will have found added support from the rise in export metal prices such as PGMs (platinum group metals) and copper.
The USD/ZAR has continued to correct from overbought levels and is currently breaking below key support at the R16.50/$ mark. A close below this level sees R16.20/$ as the next support target. The R16.20/$ level finds a confluence of both horizontal and trend line support.
However, until such time as we see the USD/ZAR trading back below the R16.20/$ level, the current move serves as a short term correction of the longer term trend. The longer term trend being that of USD strength and ZAR weakness.
Traders looking for long entry might hope for a bullish price reversal before the R16.20/$ level. Should this level instead be broken (with a close below) the long term USD/ZAR uptrend would then need to be reassessed.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Live prices on most popular markets
- Forex
- Shares
- Indices
Prices above are subject to our website terms and agreements. Prices are indicative only
