South African rand softens ahead of expected US rate cut

JOHANNESBURG, Sept 17 (Reuters) - The South African rand weakened on Wednesday ahead of an expected U.S. Federal Reserve interest rate cut and local rate-setting meeting on Thursday.

At 1228 GMT, the rand traded at 17.38 against the dollar ZAR=D3, down 0.2% from Tuesday's close.

Markets are certain the Fed will cut rates by at least 25 basis points when it makes its policy announcement later in the day.

"Recent economic indicators, including a softening labour market and inflation showing limited tariff pass-through, strengthen the case for this move," said ETM Analytics in a research note.

"Investors will particularly be focused on the Fed's forward guidance, with markets pricing in up to 100 basis points of cuts over the next year," said the note.

Like other risk-sensitive currencies, the rand often takes cues from global drivers like U.S. monetary policy in addition to domestic data points.

South Africa's Reserve Bank will announce its own interest rate decision at around 1300 GMT on Thursday, with economists polled by Reuters expecting it to leave rates unchanged.

Local inflation unexpectedly slowed to 3.3% in August ZACPIY=ECI, thanks to softer fuel and food prices.

"This softer-than-expected outcome raises the probability of a SARB rate cut at tomorrow’s meeting closer to around 50%," said Johann Els, a chief economist at Old Mutual.

"My base case remains for no change, although easing pressures from the rand, oil and food prices could see some Monetary Policy Committee members vote for a cut."

July retail sales ZARET=ECI rose 5.6% year on year in July, data on Wednesday showed, after rising by a revised 1.7% in June.

On the Johannesburg Stock Exchange, the Top-40 index .JTOPI was last down 0.1%.

South Africa's benchmark 2035 government bond ZAR2035= was firmer, with the yield falling 6 basis points to 9.175%.