The Egyptian pound regains the initiative

Just a few weeks ago, most economic analyses were focused on the ability of the Egyptian pound to withstand a wave of external and domestic pressures that began with escalating geopolitical tensions in the region, rising oil prices, and the exit of some foreign investors from local debt instruments, alongside the accompanying pressures on the foreign exchange market and heightened levels of uncertainty. Today, however, the picture appears considerably different.

Over the past week, the Egyptian pound continued to strengthen against the US dollar at a number of major banks, while the CBE recorded levels lower than those witnessed by the market during the peak of regional tensions.

This has once again raised an important question: Are we witnessing a temporary improvement driven by short-term developments, or has the foreign exchange market actually begun entering a new phase different from the one that prevailed in recent months?

Geopolitical de-escalation: the most influential variable

It is difficult to understand what is currently happening in the foreign exchange market without considering recent geopolitical developments.

The notable progress in regional de-escalation efforts and the emergence of US-Iranian understandings, together with the resulting decline in concerns over international shipping through the Strait of Hormuz, have helped ease one of the most significant sources of uncertainty weighing on both global and regional markets.

The importance of this development for Egypt lies in the fact that the stability of energy markets and international shipping directly affects import costs, inflation rates and foreign currency financing needs.

Accordingly, any sustained decline in oil prices does not merely represent positive news for the state budget, but also serves as a supporting factor for the foreign exchange market and the broader economy.

Inflation continues to improve

At the same time, inflation data has continued to send positive signals to the markets.

The decline in annual headline and core inflation rates reflects continued improvement in the pricing environment compared with previous periods and strengthens investor confidence in macroeconomic stability.

Despite the persistence of some monthly pressures linked to seasonal factors or adjustments in the prices of certain goods and services, the overall inflation trend remains more stable than it was a year ago.

This is an extremely important point for the foreign exchange market, as price stability is one of the key sources of any currency’s underlying strength.

Settling petroleum companies’ dues sends a message beyond its financial value

Among the notable developments in recent weeks has been the state’s success in settling all outstanding dues owed to foreign petroleum companies.

While the importance of this step is evident in itself, its real significance may lie in the message it sends to investors and international financial institutions.

Honouring these obligations enhances confidence in the Egyptian economy’s ability to manage its external commitments, strengthens the attractiveness of the energy sector to new investments, and contributes to improving foreign investors’ perception of the Egyptian economy.

The return of foreign inflows

Recent days have also witnessed the gradual return of some foreign investments to the government debt market. While these flows naturally remain highly sensitive to global volatility, their return at this time reflects an improved assessment by investors of the risks associated with the Egyptian market compared with previous periods of tension.

The continued stability of Egypt’s monetary policy has also provided investors with an additional degree of clarity regarding the direction of real returns and the future path of interest rates.

The external factor that remains under watch

Despite all these positive indicators, the picture is not without challenges.

The US dollar has recently demonstrated a degree of strength in global markets, while the possibility of delayed US interest rate cuts or higher returns on dollar-denominated assets remains a factor that warrants close monitoring.

In a world governed by the equation of risk and return, emerging markets, including Egypt, remain exposed to the impact of any fundamental shift in global liquidity trends.

However, the key difference compared with previous periods is that the Egyptian economy is entering this phase from a relatively stronger position, supported by improved monetary and external indicators and greater stability in the foreign exchange market.

Will the pound return to pre-28 February levels?

This remains one of the most widely discussed questions in economic and investment circles.

From a theoretical standpoint, a return of the pound to the levels that prevailed before the wave of market tensions witnessed at the end of February is not impossible, provided the current positive factors continue to accumulate, most notably geopolitical stability, lower energy prices, improved foreign currency revenues from various sources, and the continued inflow of foreign investments.

However, a more cautious reading suggests that the market is still in the process of rebuilding equilibrium and that the most likely scenario in the coming period is the continuation of movements within relatively stable ranges, with a gradual bias in favour of the pound if the current positive developments persist.

As for a rapid return to levels significantly below current ones, this remains contingent upon the simultaneous materialisation of a broad range of positive factors, making it a possible scenario, but not the baseline scenario upon which markets are currently building their expectations.

Where is the market heading by the end of the year?

In light of current data, the most likely scenario appears to be the continuation of relative stability in the foreign exchange market during the second half of the year, with the direction of the pound remaining largely linked to geopolitical developments, oil prices and global capital flows.

If regional de-escalation continues, pressures on energy markets ease, and domestic economic indicators continue to improve, the pound may find additional room for gradual appreciation. However, if geopolitical tensions re-emerge or returns on dollar assets rise significantly, this could limit the pace of that improvement or delay it.

In conclusion, what the Egyptian foreign exchange market is currently witnessing is not linked to a single factor or isolated event. Rather, it reflects the convergence of a number of positive developments that have begun moving in the same direction, starting with an improved external environment, passing through lower inflation and strengthened confidence in the economy, and extending to improved foreign inflows and developments in the energy sector.

Therefore, the question that was being asked only a few weeks ago—”Can the pound hold its ground?”—has gradually begun to give way to a new and more important question: Has the equation governing Egypt’s foreign exchange market actually shifted from defence to offence?

Mohamed Abdel Aal – Banking expert

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