US Data will Test Short Term Direction

Article by IG Senior Market Analyst Shaun Murison

USD/ZAR Key Takeaways:

1. The recent recovery of the Rand against the US Dollar is primarily due to the weakening of the dollar rather than the strengthening of the Rand itself.

2. The US Dollar is currently underperforming against various currencies, following remarks from Federal Reserve officials about the potential impact of high US Treasury Yields.

3. The upcoming week in the US economic calendar is expected to bring significant data releases that could lead to increased volatility in the USD/ZAR currency pair.

4. The USD/ZAR is currently retracing from overbought territory.

5. The USD/ZAR longer-term trend bias is considered up.

USD/ZAR Retraces on Fed Commentary

The Rand (ZAR) has begun to recover some of its recent losses against the US Dollar (USD), although a significant portion of the near-term appreciation can be attributed to the weakening of the dollar rather than the strengthening of the Rand.

The dollar is currently underperforming against a wide array of currencies, following yesterday’s remarks from Federal Reserve officials. On Monday, policymakers suggested that the high US Treasury Yields could trigger a more dovish approach to lending rates in the world’s largest economy.

USD/ZAR Technical View

The USD/ZAR produced what has now turned out to be a false break of range resistance at 19.35. The price has gone on to form a bearish engulfing price reversal (circled red) from overbought territory.

The lay of the moving averages (20, 50, and 200) suggests that the longer-term trend bias remains up, despite the short-term correction we are seeing from overbought territory.

Traders respecting the longer-term bias might prefer to wait for weakness to play out before looking for a long entry. Long entry might be considered on a bullish price reversal close to either the 18.90 or 18.70 support levels.In this scenario, a move back towards 19.35 and 19.63 provides upside targets while a close below the reversal low might provide a stop-loss consideration for the setup should it manifest.

High-impact economic data scheduled

The upcoming week in the US economic calendar is stacked with significant data releases that could potentially trigger heightened near-term volatility in the USD/ZAR currency pair. Traders might want to keep an eye on the minutes from the last Federal Reserve Open Market Committee (FOMC) meeting and the US Consumer Price Index (CPI) data, as key upcoming events.

The FOMC meeting minutes provide insights into the economic and financial conditions that influenced the members’ vote on where to set the nation’s key interest rate. Any unexpected revelations or hints about future monetary policy could spark significant fluctuations in the USD/ZAR exchange rate. For instance, if the minutes suggest an earlier-than-anticipated interest rate hike, it could strengthen the US dollar (USD) against the South African Rand (ZAR), and vice versa.

On the other hand, the US CPI data, a widely tracked inflation indicator, can also have a profound impact on USD/ZAR. Higher-than-expected inflation could push the Federal Reserve to tighten monetary policy, which would likely boost the USD. Conversely, a lower-than-expected CPI might suggest a delay in policy tightening, which could weaken the USD against the ZAR.

While South African mining and manufacturing, production, and sales data are relevant, they are expected to exert less influence on the short-term direction of the USD/ZAR pair than the aforementioned US data points. For instance, robust mining and manufacturing data could bolster the ZAR, but the effect might be overshadowed if the US data points to a stronger USD

A summary of key news events scheduled for the remainder of the week as follows: