South Africa FX Today: Rand steadies amid hopes of SARB rate cut following softer inflation

The South African Rand (ZAR) edges slightly down to 17.35 against the US Dollar (USD) on Wednesday, losing 0.1% on the day, as markets digest the latest inflation surprise ahead of the South African Reserve Bank (SARB) meeting.

This Thursday's SARB meeting at 13:00 GMT will be closely watched. After five interest rate cuts since September 2024, the last of which took place in July, the central bank could take a new step and cut its key rate again, currently at 7.00%.

But the consensus remains divided. Some analysts anticipate a status quo, others a further easing of 25 basis points (bps). This backdrop could fuel ZAR volatility, as investors adjust to a more uncertain monetary trajectory.

Between moderate inflation and strategic caution for the SARB

The Consumer Price Index (CPI) grew by 3.3% YoY in August, down from 3.5% in July and well below consensus at 3.6%, a figure hailed by many analysts as a potential game changer for monetary policy.

As Razia Khan, Chief Economist Africa & Middle East at Standard Chartered, pointed out, "this inflation release is a kind of game changer. Suddenly, the September meeting becomes very open".

The drop in inflation, coupled with the fall in two-year inflation expectations to 4.2% from 4.5% previously, according to the South African Bureau for Economic Research (BER) survey, strengthens the case for immediate easing.

This situation is all the more notable in that the SARB has embarked on an ambitious reform of its inflation target. Since July, it has favored the lower end of the target range (3% to 6%), aiming to anchor inflation around 3% rather than in the middle (4.5%).

This change in strategic direction makes the central bank's decisions more complex to interpret. As analysts at MNI Markets explain, "this transition could prompt the SARB to maintain a firm stance in order to establish its credibility, at least during the transition phase".

In other words, a rate cut on Thursday could be “politically” counterproductive.

A divided consensus but a real window of opportunity

On the markets, the implied probability of a rate cut has climbed to 60% according to forward contracts, compared with 48% before the release of the inflation figure, notes Bloomberg.

This anticipation can also be explained by the international monetary calendar. The US Federal Reserve (Fed) is also due to make its decision this week, and a much-anticipated interest rate cut in the US would open up more room for the SARB to adjust its own key interest rate, without damaging the Rand's attractiveness.

Goldman Sachs believes that an adjustment of 25 basis points is justified: "If our estimate of a 0.3 point fall in inflation expectations over the 1-2 year horizon is correct, the SARB could cut rates without easing its real stance."

However, the bank also points out that uncertainty remains high, particularly in the face of a potential change in the SARB's reaction function, which is less predictable since the reform of the inflation target.

JP Morgan considers it likely that the rate will remain at 7% after Thursday’s meeting, but retains an easing bias in the medium term, believing that further cuts are unlikely until the second half of 2026.

Ultimately, the basic scenario remains status quo, but the case for an immediate interest rate cut has strengthened on the back of lower inflation and a solid ZAR.

Technical analysis of USD/ZAR: The downtrend is reaching a critical level

USD/ZAR 4-hour chart. Source: FXStreet

Since USD/ZAR peaked at 19.93 in April, the pair has been evolving in a downtrend, currently bringing the exchange rate close to the November 2024 low at 17.27.

A break below this threshold would put the bearish support line at 17.13 in perspective, before the September 2024 low at 17.00.

Conversely, a rebound would meet potential resistance towards the bearish resistance line at 17.70, before the 100-period Simple Moving Average on the daily chart, currently at 17.81.

Beyond this, USD/ZAR could enter a more solid rebound phase, with potential targets at 18.20 and then 18.40.