The South African Rand (ZAR) has strengthened against the US Dollar (USD) this week, capitalizing on a weaker dollar and rising gold prices. The Federal Reserve’s dovish stance, hinting at potential rate cuts later in 2024, has weighed heavily on the USD. Chair Jerome Powell’s recent comments suggest the central bank is nearing a point where inflation is approaching their target, potentially paving the way for an easing cycle. This has dampened demand for the dollar as a safe-haven asset.
Meanwhile, South Africa’s economic data presents a mixed picture. While the Q4 2023 GDP figures showed marginal growth, inflation continues to be a concern, rising to 5.3% in January – nearing the upper end of the South African Reserve Bank’s target range. Governor Lesetja Kganyago has emphasized that interest rate cuts will be contingent on controlling inflation. This could limit the ZAR’s upside potential in the near term.
Technical
The USDZAR price action is currently at R18.66074, on track for its seventh consecutive losing session ahead of the crucial Non-Farm Payroll (NFP) report. The price trades comfortably below all three key Simple Moving Averages (SMAs) – the 20-SMA (green line), 50-SMA (blue line), and 100-SMA (orange line). Notably, the 20-SMA and 50-SMA have recently broken below the 100-SMA in a bearish technical crossover.
This technical setup suggests strong downward momentum. Short-term trading opportunities could emerge if the price sustains its bearish move towards the initial support level at R18.55159, which represents a 2-month low. A decisive break below this level, especially accompanied by significant trading volume, could expose the pair to further declines towards R18.43523 in the short term.
However, the oversold territory on the Relative Strength Index (RSI) (currently at 20.13) indicates a potential correction. If the price fails to maintain its downward trajectory and breaks convincingly above the 78.60% Fibonacci retracement level (R18.87219), a retracement towards the 61.80% Fibonacci retracement level (R18.87219) could be in play. A confirmed surge above this initial resistance could open doors for further bullish momentum towards the 50.00% Fibonacci retracement level (R18.97123) and potentially even R19.07026.
Summary
The USDZAR technical outlook remains vulnerable ahead of the NFP data release. Short-term trading opportunities favour the downside, with an initial target of R18.55159 and a potential extension to R18.43523 if significant volume confirms the bearish momentum. However, a contrarian play is also possible, with a potential retracement towards the 61.80% Fibonacci retracement level (R18.87219) on a bullish breakout above the 78.60% level. Market sentiment surrounding the NFP data could significantly impact the pair’s direction. A strong NFP print might reignite USD buying, while a weaker report could exacerbate the USD’s decline and bolster the ZAR.
Sources: TradingView, Trading Economics, MSN, Reuters.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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