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Daily Economic Update
31.07.2025US: Fed leaves policy rates unchanged; Powell sounds hawkish about anticipated cuts. The FOMC, as widely expected, left the Fed Fund Target rate steady at the 4.25-4.5% range for the fifth straight meeting. The committee, however, downgraded its views about the economy, seeing growth having moderated in H1 but labor market conditions solid and inflation somewhat elevated. In a historic move, two members, Waller and Bowman, dissented, voting for a 25bps interest rate cut instead, the first time in over three decades that two FOMC members have voted against the committee’s action. Chair Powell, in the post-meeting conference, cited continued inflation risks amid tariffs, saying there were “many, many uncertainties left to resolve,” but for now, was willing to look through the recent rise in goods prices. He also mentioned that the labor market is “in balance” but acknowledged that downside risks are “certainly apparent.” Overall, his bias was on the hawkish side versus market expectations; given uncertainties surrounding the inflation trajectory and the impact of government policies, he emphasized that “it doesn’t feel like we are very close to the end of that process.” While he was non-committal about the bank’s action in September, markets pared bets for a September rate cut, shifting the move to October and seeing a below 50% chance for more than one cut this year.
US: GDP in Q2 rebounds as the import drag reverses but underlying economy lackluster. US GDP in Q2 rebounded more than expected, rising 3% (annualized) following a decline of 0.5% in Q1, and better than the market forecast of 2.4% growth. The rebound was largely due to the impact of net trade reversing from the previous quarter as imports in Q1 had surged ahead of tariffs. However, the underlying economy was less robust as the rise in final sales to private domestic purchasers (a gauge of consumer and business spending) slowed further to 1.2% from Q1’s 1.9%, its weakest since Q4 22, signaling cautious household demand and an uncertain business environment amid evolving government tariff and other policies. The outlook remains somewhat tentative amid tariff-impact ambiguity though tax breaks following the recent passage of fiscal bill may provide some support. Meanwhile, President Trump announced reaching a trade framework with South Korea (US’s eighth largest goods trade partner with a 3.4% share in bilateral trade in 5M25) that would see a 15% tariff on the latter’s goods exports to the US, including autos. Korean authorities also agreed to invest $350bn in the US along with purchasing some $100bn of US energy products over the next three and half years. He also slapped 25% tariffs on Indian goods along with an unspecified ‘penalty’ for buying Russian energy and military equipment, but later clarified that negotiations were ongoing, and an outcome may be expected by the end of this week. India is the US’s 10th biggest trade partner, accounted for around 3% of US’s total goods imports in 5M25.
Japan: Central bank holds short-term rates, revising up its inflation forecasts. As widely expected, the Bank of Japan (BoJ) decided by a unanimous vote to keep the overnight call rate steady at 0.5% for the fourth consecutive meeting, maintaining a cautious monetary stance as it seeks to determine the impact of US tariffs on overseas economies and prices. The bank upwardly revised its medium-term forecast for core inflation (excl. fresh food) to 2.7% (+0.5%) and 1.8% (+0.1%) for FY25 and FY26, respectively. The price risk assessment was more hawkish than in May’s report, increasing the probability of another rate hike by the end of the year. However, the bank continued to hold the view that the underlying CPI inflation will hit its target by the second half of the projection period. Meanwhile, projections for GDP growth were largely unchanged as the BoJ expects growth to moderate to 0.6% in FY25 on the impact of higher consumer prices on private consumption and the negative effects of US tariffs on exports and other economies. Following the decision, the yen edged up to JPY148.9/$ while the yield on 5-year government bonds rose slightly to 1.105%. Markets are focusing on the upcoming press conference from the BoJ Governor, and any hints on the likelihood of another rate hike this year as the bank weighs the impact of the new political landscape, the US tariffs, and mounting inflationary pressure from higher food costs.
Eurozone: GDP surprisingly grows in Q2 but at a meager pace. GDP grew by a modest 0.1% q/q (1.4% y/y) in Q2, slowing sharply from an outsized 0.6% (1.5% y/y) growth in Q1, but versus the consensus forecast of stagnation. Given the front-loading of business activity and exports ahead of US tariffs in Q1, a sequential slowdown was widely anticipated. Amongst larger markets within the bloc, Germany returned to contraction (-0.1% q/q) after posting positive growth for two straight quarters, while Italy’s economy also declined 0.1%. Spain, meanwhile, led the growth, rising 0.7% in Q2 following Q1’s 0.6% while France also posted an unexpected 0.3% increase. Despite signing a preliminary trade deal with the US on Sunday that would hit most EU goods with 15% tariffs, uncertainty will persist until the contours of the deal are finalized, weighing on business spending and exports. The ECB also appears cautious about further policy rate cuts, with Lagarde previously mentioning that the bank was “in a good place now to hold” and remained in a “wait-and-see” mode. The IMF recently projected just 1% annual growth in 2025 followed by 1.2% in 2026. On a positive note, Germany’s plans to spend heavily on defense and infrastructure, if executed as intended, will boost economic activity over the medium term.
Egypt: Pound hits 9-month high versus US dollar. The Egyptian pound has seen a notable appreciation since April’s record low of EGP51.7/$1, reaching a nine-month high of EGP48.7/$1 as of July 30 (+6%). Balance of payments data is yet to be released for Q2 2025, but the quarter likely saw a continuation of the positive BoP trends observed in Q1, specifically the marked increase in direct and portfolio investment, remittance, and tourism inflows. This is reflected by the significant recovery in net foreign assets in the banking system, which reached $14.7 billion in May from a deficit of nearly $29 billion in January 2024, accompanied by an increase in foreign reserves to $48.7bn (5% y/y). The increased foreign inflows were driven in large part by the Ras Al-Hekma deal ($35 billion) in addition to multiple IMF disbursements. Official monthly data showed strong growth in remittance transfers in the five months to May 2025, while tourist arrival numbers likely remained elevated after growing by 25% in Q1 to 3.9 million visitors. US dollar weakness has also been a key factor to the EGP rally, with the dollar DXY index down nearly 10% ytd as of July 30. Though interest rates were cut twice earlier this year, the key policy rate remains high at 24%, and the interest rate differential with international counterparts remains sizeable, encouraging foreign currency inflows and deposits, which have helped to bolster the pound. Looking forward, pound strength will depend on continued foreign investment momentum, interest rate dynamics, and steadfast progress towards structural reforms, which is key for investor confidence and favorable business conditions. This includes a continued commitment to the flexible exchange rate regime and sustained efforts towards divestment and asset sales to drive FDI and private sector growth. A potential recovery in Suez Canal revenues will also be supportive of the pound. Slow reform progress or failure to achieve fiscal targets could dent investment inflows or lead to further delays to the disbursement of the remainder of the $8 bn IMF support package, factors which could exert downwards pressure on the currency, compounded by the possibility of a stronger US dollar.