Fed Faces Difficult Policy Balancing Act

Tomorrow’s Federal Open Market Committee meeting is expected to deliver one of the year’s most closely watched monetary policy decisions. President Donald Trump has again publicly called for an interest rate cut, yet the economic backdrop provides little justification for easier policy. Headline PCE inflation remains elevated at 4.10%, core PCE stands at 3.40%, consumer spending remains resilient, AI-related investment continues to accelerate and employment remains close to full employment.

Against this backdrop, Fed Chair Kevin Warsh has consistently argued that persistent inflation cannot be tolerated. Although several policymakers believe current interest rates may not be sufficiently restrictive, an immediate rate hike would surprise markets. ETM therefore expects the most likely outcome to be a hawkish hold—keeping rates unchanged while clearly signalling that another increase remains possible as early as September should inflation fail to moderate.

Oil Prices Continue to Fall as Diplomacy Progresses

Markets received further encouragement after President Trump confirmed that the United States and Iran continue diplomatic discussions aimed at ending the Middle East conflict. While Iran disputes that formal negotiations are underway, the absence of direct military action for three consecutive days has significantly reduced immediate fears of supply disruptions.

Brent crude has now retreated towards $87 per barrel, extending Monday’s sharp 8.7% decline, while WTI trades near $81 per barrel. Additional supply support has come from the resumption of Kazakh exports, and analysts note that a successful diplomatic agreement could potentially create an oil surplus of roughly 2 million barrels per day later this year. Nevertheless, shipping disruptions through the Strait of Hormuz remain severe, meaning energy markets remain vulnerable should negotiations fail.

Rand Remains Under Pressure Despite Cheaper Oil

Normally, falling oil prices provide meaningful support for the rand by improving South Africa’s trade balance and reducing imported inflation. However, ETM argues that this relationship has weakened considerably following last week’s SARB decision to leave interest rates unchanged.

Ahead of the Fed meeting, the rand remains defensive as investors favour the US dollar. Additional pressure comes from renewed weakness in global semiconductor shares, which has increased broader market risk aversion. ETM believes the rand is now trading in an uncomfortable range near its May highs and warns that any increase in market volatility could quickly push the currency weaker.

Analysts also argue that the SARB’s decision not to raise rates may ultimately prove counterproductive. Markets had overwhelmingly expected a rate increase, and leaving rates unchanged has arguably increased the rand’s vulnerability during periods of global financial stress.

Bond Markets Remain Cautious

Attention today turns to South Africa’s R2.55 billion government bond auction. National Treasury has shortened the maturity profile of today’s auction by replacing the longer-dated R2042 bond with shorter-dated securities, reducing overall duration risk.

Investor demand has softened for two consecutive weeks, with bid-to-cover ratios declining despite Treasury successfully allocating the full amount on offer. Investors continue to demand higher yields before participating, suggesting that confidence remains cautious rather than optimistic.

Although lower oil prices and a modest recovery in the rand have improved the backdrop somewhat, tomorrow’s Fed decision and lingering geopolitical uncertainty continue to discourage aggressive duration buying.

Markets Still Expect Further SARB Tightening

Forward Rate Agreements continue to imply that South African interest rates are likely to move higher over coming months.

The longer-dated 9×12 FRA still prices in the equivalent of roughly three additional 25 basis point rate increases, reflecting the view that last week’s decision merely postponed rather than eliminated the need for tighter monetary policy.

ETM argues that a modest 25bp increase last week may have prevented the need for more aggressive tightening later. Unless geopolitical tensions ease sufficiently to reduce inflation risks, the SARB may ultimately be forced to catch up.

Gold Softens as Safe-Haven Demand Eases

Improving diplomatic prospects have reduced demand for traditional safe-haven assets.

Gold eased towards $4,040 per ounce as investors reassessed geopolitical risks and focused instead on tomorrow’s Fed meeting. Markets currently assign roughly a 40% probability of another 25bp Fed rate increase.

Despite the recent decline, gold continues to find strong technical support near $4,000 per ounce, supported by ongoing ETF inflows and continued investor buying on weakness. Future price direction will depend largely on tomorrow’s Fed guidance and whether diplomacy between Washington and Tehran succeeds.

Agricultural Markets Face European Weather Risks

Agricultural commodity markets remain heavily influenced by adverse weather across Europe.

The European Union has reduced crop forecasts following prolonged heatwaves and drought, with grain maize experiencing the largest downgrade. France’s maize outlook has been cut by 13%, while wheat, sunflower and rapeseed forecasts have also been lowered.

If hot and dry weather persists, additional production losses could increase food price pressures later this year.

Chart of the Day

Today’s chart illustrates South Africa’s CPI steadily rising as both goods inflation and services inflation accelerate. Goods inflation has increased sharply alongside higher crude oil prices, while services inflation remains persistently elevated. Together, these trends have lifted headline CPI back to approximately 5%, reinforcing ETM’s argument that inflation risks remain skewed to the upside and supporting expectations that further SARB tightening may eventually become necessary.

Bottom Line

Markets are enjoying a temporary period of geopolitical calm, reflected in sharply lower oil prices and reduced safe-haven demand. However, investor attention has shifted decisively to tomorrow’s Federal Reserve meeting, where a hawkish hold remains the most likely outcome. Such a decision would keep the US dollar well supported and leave the rand vulnerable, particularly after the SARB’s surprise decision to leave rates unchanged. Bond markets continue to price further South African tightening, while lower oil prices offer only temporary relief until greater clarity emerges on both US monetary policy and Middle East diplomacy.

Daily Market Report – 28 July 2026