The USDZAR pair navigated a week marked by a 1.2% gain, primarily propelled by the US dollar’s strength amid lingering inflation concerns.
Recent inflation data from the US reinforced the Federal Reserve’s challenge in managing inflationary pressures, potentially delaying rate cuts. In South Africa, despite the rand’s depreciation against the dollar to approximately 18.9 per USD, the South African Reserve Bank faces stubborn inflation, leaving the central bank likely to maintain a higher interest rate stance to combat it, which could limit the greenback’s dominance against the rand. February’s headline inflation reached 5.6%, surpassing the central bank’s preferred midpoint of 4.5%, signifying prolonged rate stability in South Africa.
Market sentiment remains cautious as other central banks consider early rate cuts, contrasting the Fed’s stance. The dollar index surged to three-week highs, supported by the Swiss National Bank and Bank of England’s dovish tones, while the Bank of Japan maintains accommodative policies.
Technical
The 4-hour chart shows that the pair is currently trading at R18.9814, in a critical zone as the rand attempts to counter recent US dollar dominance. Recent movements saw price breaking above the 20-SMA (green line), 50-SMA (blue line), and the downward-sloping 100-SMA (orange line), indicating a potential shift in momentum. The upward-sloping Relative Strength Index (RSI) above 50 further reinforces this bullish sentiment.
With the RSI (55.55) upward-sloping above the 50.00 level, a sustained push above the supply zone could leave the 61.80% Fibonacci retracement level (R19.05199) as the initial resistance level of note higher. A confirmed break above the initial resistance could likely leave the 78.60% Fibonacci retracement level (R19.20101) and R19.31057 as the next levels of significance higher.
However, failure to sustain a push above the supply zone would bring the 50.00% Fibonacci retracement level into focus, with a break below the level likely to bring the 38.20% Fibonacci retracement level (R18.84265) into play in the coming sessions. A successful break below the R18.84265 price level, on significant volume, would likely bring the 23.60% Fibonacci retracement level (R18.71314) and the R18.61336 support level within reach of the bears in the short-term.
Summary
Market sentiment remains a mixed bag. The stronger US dollar on inflation worries puts upward pressure on USDZAR. However, expectations of easing South African inflation and a potentially risk-on market environment could offer support to the rand. Technically, a bullish breakout above the current resistance zone could signal a potential trend reversal, with the dollar continuing its’ recent recovery against the rand. Conversely, a breakdown below support levels could indicate continued depreciation of the US dollar.
Sources: TradingView, Trading Economics, Federal Reserve.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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