USD/ZAR drops to key support ahead of FOMC minutes

The USD/ZAR exchange rate drifted downwards for two straight days after the latest South Africa inflation numbers. The pair also retreated as the focus among traders shifted to the upcoming FOMC minutes. It retreated to a low of 18.80, its lowest swing since February 2nd.

The USD to rand pair drifted downwards after South Africa published a mixed inflation report. The headline Consumer Price Index (CPI) rose from 5.1% in December to 5.3% in January. That increase was smaller than the median estimate of 5.4%. 

Core inflation, on the other hand, rose from 4.5% to 4.7%, which was also higher than the expected 4.5%. It increased from 0.2% to 0.3% on a MoM basis.

These numbers mean that inflation is still a challenge in South Africa. However, on the positive side, the inflation rate is still inside the SARB range of between 4.5% and 6%. As such, the bank will likely not intervene by hiking rates later this year.

The South African rand has done much better than its peer African currencies. In Nigeria, the naira has plunged to 1,500 as it has lost over 50% of its value in the past few months. Elsewhere in Egypt, the pound has been stable but will likely be devalued soon.

Looking ahead, the USD/ZAR pair will be in the spotlight later on Wednesday as the Federal Reserve is expected to publish minutes of the last meeting soon. These minutes will provide more information about what happened in the past meeting.

The US dollar index (DXY) and bond yields have pulled back ahead of these minutes. The yield of the 10-year and 30-year government bonds has dropped to 4.25% and 4.43%, respectively. Similarly, the DXY index has moved to $104. 

The USD/ZAR has made a strong bearish breakout in the past few days. This retreat started after the pair retested the important resistance at 19.16, where it struggled to move above since October last year.

The pair has drifted below the 50-day and 25-day moving averages. It has also retested the ascending trendline that connects the lowest swings since January. Therefore, the pair will likely continue falling as sellers target the key support at 18.50. More South African rand weakness will be confirmed if the USD/ZAR rises above 19.15.

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