Fed Holds Rates, Signals Future Cuts
The US Federal Reserve left its benchmark interest rate unchanged at 4.25%–4.50% for the fourth consecutive meeting, but hinted at the possibility of two cuts before the end of 2025. While the decision was largely anticipated, Fed Chair Jerome Powell noted internal divisions within the committee, which is grappling with balancing softening inflation against persistent global uncertainties.

The Fed also revised up its inflation and unemployment projections, citing concern over potential inflationary risks arising from President Trump’s aggressive tariff strategy. However, markets had already priced in a delayed rate cut, limiting the reaction to the Fed’s announcement.

Middle East Geopolitical Risks Roil Markets

Global risk appetite took a hit after reports surfaced that the US is preparing military contingencies for potential action against Iran. The Pentagon is said to be drawing up plans for diplomatic and military responses, heightening fears of an expanded conflict following Israel’s recent strikes on Iranian nuclear infrastructure.

Investors reacted swiftly: oil prices surged, equities slid, and demand for safe-haven assets like gold and the US dollar climbed. The risk-off mood fed through into emerging markets, placing pressure on the South African rand.

Rand Under Pressure Despite Strong Local Data

The ZAR slipped on Wednesday, breaching 18.03 against the dollar as global jitters overshadowed local economic data. Although May’s consumer inflation remained unchanged at a benign 2.8% y/y—below the SARB’s 3%-6% target band—and core inflation eased to 3.0%, the rand failed to gain traction.

Retail sales in April surprised to the upside with a 5.1% y/y increase, but analysts cautioned that this was boosted by calendar quirks and a low base. The fading impact of two-pot pension withdrawals also suggests consumer momentum may be peaking.

Currency traders pointed to technical resistance levels near 18.19, highlighting the ZAR’s vulnerability to external shocks. The rally in gold and platinum prices has so far failed to counter the risk-off sentiment dominating markets.

South Africa’s Competitiveness Ranking Slips

Gold prices retreated marginally to $3,385/oz after a sharp rally last week, as traders weighed mixed US data and hawkish Fed commentary. Meanwhile, platinum and palladium gained, and aluminum hit a two-month high amid fears of global supply disruptions.

Energy markets were particularly volatile. Oil prices jumped nearly 10% over the past week, with Brent crude and WTI trading near five-month highs. The threat of disruptions to Middle Eastern supply chains, especially the Strait of Hormuz, has rattled traders. Speculative positioning in oil options has turned more bullish than during Russia’s invasion of Ukraine, underscoring market concern.

Fed to Hold Rates, Guidance in Focus

In another blow to sentiment, South Africa dropped to 64th out of 69 countries in the latest global competitiveness rankings. The report cited chronic issues including poor infrastructure, elevated unemployment, rising debt levels, and ongoing governance challenges.

The findings underscore the urgent need for structural reform and improved policy execution if South Africa hopes to reverse its economic stagnation and attract meaningful investment.

 Bond Market Holds Steady, Eyes Oil Prices

South African bond yields were steady despite the Fed’s dovish tone and local inflation data. However, analysts are closely monitoring the recent spike in oil prices, with Brent crude pushing above $76 per barrel.

A sustained rise in oil costs—driven by Middle East supply fears—could rekindle inflation concerns and make it harder for the SARB to justify further rate cuts, even as growth remains sluggish.

 Gold Gains as Safe-Haven Demand Rises

Gold surged to $3,370/oz, reflecting investors’ scramble for safety amid global volatility. The metal’s rise has supported South Africa’s terms of trade, though not enough to shield the rand from broader pressure.

Meanwhile, copper smelters in China are under stress due to oversupply and falling treatment charges, adding further complexity to global commodity dynamics.

 Outlook: Structural Reforms Key to Rand Stability

While the ZAR correction was expected after a long appreciation phase, analysts warn that South Africa’s longer-term prospects hinge on credible reform and policy execution. With geopolitical tensions flaring and global growth forecasts under strain, the rand may remain volatile in the near term, especially if the Israel-Iran conflict escalates or the Fed turns more hawkish again.

For now, technical indicators suggest further ZAR weakness toward 18.19, though the broader trend still leans towards gradual USD depreciation, if global risk sentiment stabilises.