The USD/ZAR exchange rate rose by a few pips today, July 9, as crude oil prices rose following the new strikes in the Middle East. It jumped to 16.50 on Wednesday and then pulled back a bit to 16.37. 

South African rand falls as geopolitical tensions rise

The South African rand softened a bit after the US and Iran restarted their strikes, with President Donald Trump declaring the truce over. As a result, crude oil prices jumped as investors anticipated more traffic disruptions at the Strait of Hormuz.

This disruption will happen at a time when inventories in the US and other countries remain at dangerously low levels. Indeed, Trump noted that worries in the oil market were one of the reasons why he decided to reach a one-sided deal with Iran. 

Rising oil prices will make the South African inflation situation worse and push the central bank to intervene. The most recent data showed that the headline CPI jumped 4.5% in may from 3% in February. It has remained above the central bank’s target level since March this year.

In a statement at the European Central Bank (ECB) forum in Portugal, the head of South Africa’s central bank hinted that the bank may be forced to hike interest rates later this year. The bank has already hiked rates to 7% this year, with market participants expecting at least one more.

The South African rand has also struggled because of the ongoing developments in the metals industry. Gold, a key South African export, has plunged to $4,080, down by 27% from its highest point this year. Platinum and palladium prices have also pulled back.

Federal Reserve may hike rates this year

Meanwhile, there are signs that the Federal Reserve will hike interest rates this year. Fed minutes released on Wednesday showed that the committee entertained different scenarios in the last meeting. 

Some members supported a view where the bank started cutting rates later this year, contigent on falling inflation. Others, however, supported hiking rates later, citing the elevated inflation, which has remained above the 2% target for a while.

Fed and SARB policies have an impact on the USD/ZAR pair because of the carry trade situation. The rand normally attracts more demand whenever the SARB is hiking rates as that makes it more attractive. 

Looking ahead, the next main catalyst for the USD/ZAR pair will be the upcoming US inflation report coming out next week.

USD/ZAR technical analysis

USDZAR chart | Source: TradingView

The daily chart shows that the USD/ZAR pair has come under pressure in the past few months. It has dropped from a high of 17.25 on March 23rd to the current 16.35. 

The pair is now consolidating at the 25-day and 50-day Exponential Moving Averages (EMA). It also formed a falling wedge pattern, which is made up of two descending and converging trendlines. 

This wedge pattern normally leads to a strong bullish breakout. If this happens, the next level to watch will be the psychological point of 17. A drop below the lower side of the wedge will point to more downside.

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The US Dollar (USD) struggled to attract buyers early Thursday despite a fresh escalation in tensions in the Middle East.

Investors shifted their focus toward upcoming US economic data releases and comments from central bank officials while monitoring developments in the region.

The US economic calendar is scheduled to feature weekly Initial Jobless Claims and Existing Home Sales data for June later in the day.

Market participants are also expected to closely watch remarks from policymakers for fresh signals on the economic outlook and monetary policy.

Middle East tensions remain in focus

Geopolitical tensions intensified after the United States military said late Wednesday that it had struck 90 targets along Iran’s coastline.

In response, Iran’s Revolutionary Guard reportedly targeted US military bases in Kuwait and Bahrain.

Despite the renewed hostilities, crude oil prices edged lower during the European trading session on Thursday.

At the same time, the US Dollar Index remained under pressure, trading below the 101.00 level.

Risk sentiment appeared relatively resilient as US stock index futures advanced between 0.2% and 0.7%, suggesting investors were not moving aggressively toward traditional safe-haven assets.

The euro and pound extend gains against the dollar

The euro strengthened against the US dollar as renewed weakness in the greenback supported the common currency.

After ending Wednesday’s session largely unchanged, the EUR/USD pair climbed toward the 1.1450 level during the European session on Thursday.

The British pound also maintained its upward momentum.

GBP/USD extended gains after closing in positive territory on Wednesday and traded above the 1.3400 mark, reaching its highest level in three weeks.

Yen strengthens as Bank of Japan maintains regional assessment

The Japanese yen gained against the US dollar after USD/JPY reversed lower on Thursday.

The currency pair traded below 162.50 after posting a gain of around 0.3% in the previous session.

Meanwhile, the Bank of Japan’s latest quarterly regional report showed no changes to its overall assessment across all nine regions of the country.

The report indicated that most regional economies continue to recover moderately.

Indian rupee opens stronger

The Indian rupee opened higher against the US dollar on Thursday, supported by broad-based weakness in the US currency.

The USD/INR pair declined to around 95.40 as the dollar softened.

However, the broader outlook for the pair remained bullish, with renewed Middle East hostilities continuing to support oil prices, a factor that could influence the rupee going forward.

For now, currency markets continue to balance geopolitical uncertainty with incoming economic data, while movements in oil prices, gold and global risk sentiment remain key drivers of trading activity.

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Financial markets remained volatile heading into the weekend as investors avoided taking large positions amid continued uncertainty surrounding the conflict.

Market participants largely stayed on the sidelines, limiting major moves across asset classes.

The June labor market report from Canada is expected to be the day’s only major economic release with the potential to drive market sentiment during the second half of the session.

Meanwhile, the US Dollar (USD) struggled to maintain momentum after posting modest losses on Thursday.

In the absence of high-impact US economic data, improving risk appetite weighed on the greenback.

The positive tone in equity markets, reflected by gains in Wall Street’s major indexes, reduced demand for the safe-haven currency.

Early on Friday, US stock index futures traded mixed, while the US Dollar Index remained under pressure, hovering around 100.75.

Euro and Pound extend gains

The euro maintained its strength against the US dollar during early Friday trading.

EUR/USD edged higher toward the 1.1450 level after data from Germany confirmed that the country’s annual Consumer Price Index (CPI) increased 2.3% year-over-year in June.

The reading matched the preliminary estimate, providing little surprise for markets.

The British pound also continued its recent advance.

GBP/USD extended its weekly gains and traded above the 1.3400 mark, reaching its highest level since the middle of June.

Canadian dollar awaits employment data

The Canadian dollar strengthened against its US counterpart ahead of the country’s June labor market report.

USD/CAD remained under pressure during the European session, falling toward 1.4150.

Market expectations point to Canada’s unemployment rate holding steady at 6.6% in June.

The employment report is expected to be closely watched as it could influence expectations for the Canadian economy and prompt fresh movement in the currency pair.

Strong Japanese inflation data supports the yen

Earlier on Friday, data from Japan showed that the country’s Producer Price Index (PPI) rose 7.1% year-over-year in June.

The latest reading accelerated from the 6.6% increase recorded in May and exceeded market expectations of 6.8%.

Japan’s Finance Minister, Satsuki Katayama, said the government will closely monitor economic indicators and financial market conditions.

Following the stronger-than-expected inflation data, USD/JPY remained under bearish pressure, declining about 0.5% on the day to trade near 161.60.

Indian rupee strengthens despite oil price concerns

The Indian rupee extended Thursday’s recovery against the US dollar during Friday’s opening session.

USD/INR fell further toward 95.22 as the US dollar weakened amid hopes that renewed conflict in the Middle East between the United States and Iran would not become prolonged.

However, the rupee could still face pressure if elevated oil prices persist, as higher energy costs remain a potential headwind for the Indian currency.

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