Rand Firms as Investors Weigh SARB and Fed Policy Paths

Key Moments

Rand Recovery Amid Softer Inflation Data

The South African rand has strengthened this week, clawing back part of the decline seen since February. The USD/ZAR exchange rate fell to 16.62, easing from this month’s high of 16.96, as market participants reassessed the outlook for South African monetary policy and inflation.

The move coincided with the release of South Africa’s latest inflation figures. The country’s statistics agency reported that consumer price growth slowed in February, before the Iran war began. Headline Consumer Price Index (CPI) rose 3% year-on-year in February, down from 3.5% in January and slightly below the median forecast of 3.1%.

Core inflation, which excludes food and energy, also moderated, slipping from 3.4% in January to 3% in February. On a month-on-month basis, however, headline CPI and core CPI increased by 0.4% and 0.7%, respectively.

Despite the seemingly benign February reading, the data is widely viewed as of limited use for policy makers, as it predates the onset of the Iran war. The conflict has driven prices higher in key global commodities, including crude oil, natural gas, and fertilizers, with potential ramifications for South African inflation.

SARB Outlook and Capital Flows

Against this backdrop, analysts expect the South African Reserve Bank to maintain its policy rate at 6.75% at its upcoming meeting on March 26. A pause in rate adjustments is seen as giving officials room to evaluate how the war-induced rise in energy and input costs will feed through to domestic prices.

The war has already had an impact on South African financial assets. Foreign investors have been net sellers of rand-denominated instruments, with non-residents offloading $2.45 billion of government bonds last week. This marks the largest weekly outflow since 2019 and contrasts sharply with the pattern earlier in the year, when foreign investors were net buyers of South African bonds and equities.

Fed Decision in Focus

The next major event for USD/ZAR is the Federal Reserve’s policy announcement, scheduled for later today. Market economists widely expect the Fed to keep its benchmark rate unchanged in a range of 3.50% to 3.75%.

Fed Chair Jerome Powell and his colleagues remain concerned about inflation dynamics, particularly in light of rising energy prices. According to analysts cited in the article, inflation could climb to 3% if oil prices stay above $95.

At the same time, the central bank is monitoring the risk of stagflation, where elevated inflation coincides with weak labor market conditions. Recent figures showed the unemployment rate increasing to 4.4% in February. Another data release indicated that economic growth in the fourth quarter of last year was slower than anticipated.

USD/ZAR Technical Picture

On the daily chart, the USD/ZAR pair has advanced over the past two months, rising from a low of 15.64 to a high of 16.95 earlier this month. The move higher followed the formation of a double-bottom pattern, with a neckline around 16.42, which was the highest level reached in February.

More recently, the pair has eased as oil prices have generally stabilized, but USD/ZAR remains above its 50-day and 100-day Exponential Moving Averages and continues to trade above the Supertrend indicator.

Based on this technical backdrop, the outlook presented in the article is that the pair is likely to resume its upward trajectory in the coming days, potentially retesting the year-to-date high of 16.95. A sustained break above that level would signal further upside, with attention then shifting toward resistance around 17.50.