Following the Fed’s policy meeting last night, at which is left rates unchanged but sounded less confident about the disinflation outlook, the spotlight is now on the SARB. Recall that rates were lowered by -0.25% in September and again by -0.25% in November, bringing the repo rate to the current 7.75% (Prime: 11.25%). All 19 economists surveyed in the past week by Reuters were unanimous in predicting that the SARB would cut rates again today, which is unsurprising after last week’s softer-than-expected CPI data. However, and notwithstanding weak price pressures in SA at the moment, the decision may not be as simple and clear-cut as polls suggest. This is evident in market positioning, with the 1×4 forward rate agreement pricing in only 10.6bps of rate-cut risk, or less than a 50% chance of a rate reduction today. We tend to agree with the market that a rate cut is not a foregone conclusion, and that the SARB may consider it prudent to wait until March before cutting rates as there are still too many unknowns that warrant some patience.

Market volatility earlier this week once again underscored the ZAR’s sensitivity to negative developments and uncertainty, serving as a warning to the SARB that further rate cuts- without fully assessing the unintended consequences of Trump’s policies and overvalued equity markets – carry risks that could jeopardise long-term inflation objectives. Another significant inflation risk to consider is the magnitude and impact of prospective electricity price hikes in South Africa, which NERSA will reportedly announce today. The regulator is considering an application for a tariff increase of 36% in 2025, 12% the following year, and 9% in 2027/28. Although it is unlikely that NERSA will approve these price hikes in full, it is not currently clear just how big a tariff hike it will give the go-ahead. Finally, there is the February budget speech to consider. Investors are already priced for some reforms, but there is no clarity on the impact on fiscal sustainability. With this in mind, the February budget speech is a potential catalyst for financial market instability and is thus another factor for the SARB to consider when deciding whether to cut rates today or wait until March.

ZAR Markets

Although the ZAR posted another strong performance yesterday, it has yet to fully recover Monday’s losses. Market sentiment remains cautious ahead of the SARB’s decision later today, which will be the focal point. Investors largely anticipate an easy decision to cut rates, but that assumption carries risks. The decision may be more complex than initially expected, particularly in light of the Fed’s guidance last night, which reinforced that the battle against inflation is far from over. Technically speaking, the market has run into support around the 23.6% Fibonacci retracement level of the USD-ZAR’s 13-24 January move at 18.5211, which could provide a floor for the retracement of Monday’s move. Below 18.5211, the next line in the sand is the pair’s 50-session moving average at 18.4389, and then recent lows at 18.3022.

Global FX Markets

The Federal Reserve decided to hold interest rates steady on Wednesday, despite former President Donald Trump’s call for further cuts. Trump, who appointed Fed Chair Jerome Powell, criticized the Fed on Truth Social, blaming it for inflation and pledging to address the issue through energy production, deregulation, trade adjustments, and manufacturing growth. He also accused the Fed of poor banking regulation and suggested shifting that responsibility to the Treasury Department, though its legality is uncertain. The single currency has received a bid tone as we enter the final stages of the week with the ECB decision now at the forefront of investors minds. A dovish cut is expected by the market which is likely to compress the US-EZ yield spreads and thus place pressure on the EUR/USD. Selling the upticks is the favoured play for now. Facing pressure to accelerate economic growth, FinMin Reeves also pledged investments in offshore wind power, electric vehicle charging, and mining. However, her recent corporate tax increases have raised concerns among businesses. Farmers protested her decision to end an inheritance tax exemption for farming families. This coupled with broad-based USD consolidation has allowed sterling to hold above GBP/USD1.2420 as the week draws to a close  Japanese Finance Minister Katsunobu Kato and U.S. Treasury Secretary Scott Bessent agreed to cooperate on forex and other economic issues during a video conference. Kato did not confirm if tariffs were discussed. This was Bessent’s first international video meeting since taking office. Both officials also pledged to strengthen collaboration in forums like the G7 and G20. This will give FX traders some comfort that the yen will not be plagued by the tariff narrative driving other currencies for now