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Daily Economic Update
19.06.2025US: Fed leaves rates unchanged, sees slower growth and higher inflation in 2025-26 than before. The FOMC, as widely expectedly, kept the Fed fund target rate unchanged at the 4.25-4.5% range in a unanimous vote, noting still solid economy and labor market conditions, a low unemployment rate and somewhat elevated inflation. The committee mentioned that uncertainty about the economic outlook has “diminished” but remains elevated. The median projections showed slower GDP growth in 2025 (1.4% Q4/Q4 versus the 1.7% projected in March) with higher PCE inflation in 2025 (3% in Q4 versus 2.7%). The dot-plots continued to show two interest rate cuts of 25 bps each in 2025 but just one in 2026 versus two seen earlier. However, even in 2025, the dots moved up with more participants in favor of keeping rates on hold this time around than in March (seven versus four), indicating their cautious approach amid tariff-induced higher prices and continued robust economic and labor market conditions. We think it is hard to reconcile the committee’s projections of a meaningful increase in PCE inflation in 2025 (to 3% y/y in Q4 from 2.1% in April), only a minor uptick in unemployment (to 4.5% in Q4 from 4.2% in May) along with delivering two interest rate cuts before year-end. Chair Powell, in the post-meeting conference, repeatedly highlighted higher tariffs as a source of uptick in inflation over the coming months but also emphasized the bank’s inability to forecast the size of the impact, and therefore, leaned towards keeping monetary policy “modestly restrictive” currently. He also downplayed the possibility of any lasting impact of current geopolitical tensions in the Middle East on the US economy. US equity markets gave back their prior slight gains after Powell’s somewhat hawkish message, with the S&P 500 closing flat yesterday and yields on UST 10Y moving only a little d/d.
Oil: Prices rise slightly after large US stock draws. Oil prices rose marginally yesterday, with Brent futures gaining 0.3% d/d to settle at $76.7/bbl after Iran’s Supreme Leader Ayatollah Ali Khamenei rejected US President Trump’s demand for unconditional surrender and weekly data showed large crude inventory drawdowns in the US. The conflict is poised to continue, and potentially escalate, given the more aggressive posture adopted by the US, with media sources reporting that the US is preparing for a possible strike on Iran in the coming days and following Trump’s comments that the “next week will be big”. Meanwhile, commercial crude stockpiles in the US fell by the most in a year after the sudden spike in oil prices recently with the weekly EIA report showing a 11.5 mb w/w decrease in the w/e ending June 13. The market will remain on notice for any potential escalation in the conflict, mainly in the form of direct US involvement in the war against Iran.
UK: Inline CPI inflation to keep the BoE on track to hold the policy rate later today. CPI inflation in May softened to 3.4% y/y from 3.5% in April, in line with the market as well as the Bank of England’s (BoE) projections. The core rate also eased to 3.5% from 3.8% the previous month. While goods inflation accelerated to an 18-month high of 2%, services inflation slowed to 4.7% as transport services saw a sharp disinflation. On a monthly basis, the headline CPI rose by a four-month low rate of 0.2% after April’s two-year high of 1.2%, which was influenced by higher government and utility charges after taking effect in April. Similarly, core CPI increased at a moderate pace of 0.2% m/m after April’s 1.4%. Given that the inflation print broadly matched expectations, the BoE in its MPC decision due later this afternoon is expected to keep the bank rate steady at 4.25% while likely continuing to guide for “a gradual and careful approach” amid the global uncertainty. More interesting would be the participants’ vote split, which could signal the MPC’s future bias.
Egypt: Currency weakens amid uncertainty linked to Israel-Iran conflict. The outbreak of hostilities between Israel and Iran pushed the Egyptian pound weaker this week close to the EGP51/$1 level in intraday trading for the first time since April. In common with other currencies, the pound had been on an upward trajectory against the US dollar since the beginning of May – up almost 3% over this period prior to last weekend’s attacks – to EGP49.5/$1. But a flight to safety, seen also in the decline of the EGX30 of 5% so far this week, has since seen the currency depreciate by 2.0% w/w (closing at EGP50.5 on Wednesday). Egypt is especially sensitive to regional geopolitical upheaval, given its dependence on Suez Canal and tourism receipts, its large US dollar-denominated and energy-heavy import bill and its close geographical proximity to conflict hotspots in the Levant, North Africa and the Arabian Peninsula. Israel’s suspension of pipelined gas to Egypt on 13 June as it took its offshore Leviathan and Karish fields offline in preparation for potential Iranian reprisals, is exacerbating an already challenging energy situation for the authorities. The country faces the prospect of rolling blackouts in the coming weeks as gas demand for electricity spikes during the hot summer months. Taken together, the deterioration in the regional environment presents a downside risk to Egypt’s economic outlook via higher energy costs, lower fiscal and external revenues, ‘risk-off’ capital outflows and even delayed monetary easing due to higher inflation.