From the Strait of Hormuz to the Egyptian Pound: How Risk Travels

Wars are no longer measured solely by the number of missiles launched or aircraft deployed. Increasingly, they are measured by their impact on oil prices, capital flows, exchange rates, and investor confidence. The developments of recent weeks provide a clear illustration. Barely a month after the United States and Iran signed a memorandum of understanding—widely viewed as the beginning of a period of de-escalation—military confrontation returned to the forefront, reminding markets that the greatest threat is often not war itself, but the uncertainty that accompanies it. This raises an important question: How can events unfolding thousands of kilometres away affect the Egyptian pound? The answer lies in understanding how risk travels. It begins at the Strait, but it does not end with oil When tensions rise around the Strait of Hormuz, markets react immediately out of concern for global energy supplies. Oil prices climb in anticipation of potential disruptions to production or shipping, reflecting the Strait’s strategic importance to global energy trade. But the consequences extend far beyond energy markets. Higher oil prices increase import costs, fuel inflationary pressures, and raise production and transportation expenses. Maritime insurance premiums and shipping costs also rise, placing additional pressure on energy-importing economies, including Egypt. At the same time, global investors reassess their portfolios. Many reduce their exposure to emerging markets and shift toward assets perceived as safer during periods of uncertainty. In this way, the shock moves gradually from geopolitics to the real economy, then to financial markets, and ultimately to the foreign exchange market. What does recent experience tell us? Market developments over recent months reveal a clear pattern. Before tensions escalated in February, markets were relatively calm, and the Egyptian pound enjoyed a period of relative stability, supported by improving foreign currency inflows. As military confrontations intensified, oil prices surged, global risk aversion increased, and pressure emerged across many emerging-market currencies, including the Egyptian pound. The subsequent US-Iran memorandum of understanding helped ease oil prices, improve investor sentiment, and allowed the pound to recover a significant part of its strength—demonstrating how quickly financial markets respond when expectations improve. More recently, renewed escalation has once again increased uncertainty. Oil prices have climbed, markets have begun re-pricing risk, and attention has shifted back to future developments. This underlines a crucial point: markets are influenced less by the event itself than by the degree of certainty surrounding what comes next. Is the Egyptian pound better positioned to withstand shocks? The answer today appears more balanced than in the past. No one can credibly argue that the Egyptian economy is insulated from global developments. Equally, however, it is fair to say that its capacity to absorb external shocks is stronger than it was in previous years. Exchange rate flexibility has become the first line of defence, allowing part of any external shock to be absorbed gradually without rapidly depleting foreign exchange reserves. At the same time, stronger international reserves, an improving balance of payments position, and the banking sector’s return to a net foreign asset surplus have enhanced the economy’s resilience against external volatility. The continuation of prudent monetary policy also helps preserve the attractiveness of pound-denominated assets amid global uncertainty. None of this suggests that risks have disappeared. Rather, it indicates that the economy is now better equipped to manage them. What should we expect in the coming period? Three broad scenarios can be envisaged. The first is that diplomatic efforts succeed in containing the escalation. Such an outcome would likely lead to a gradual decline in oil prices, an improvement in investor risk appetite, and easing pressure on emerging markets, including Egypt. The second scenario—which currently appears the most likely—is that tensions persist without developing into a full-scale regional conflict. Under these circumstances, markets would probably remain volatile but avoid severe disruption, while the Egyptian pound would continue to move flexibly in response to shifts in supply and demand. The third scenario—the least likely but potentially the most costly—would involve a broader conflict that directly disrupts global energy supplies or international trade. Such an outcome would place far greater pressure on energy-importing economies, not only Egypt but many others around the world. The key lesson Recent crises have demonstrated that modern economies are influenced less by geographical distance than by the degree of interconnectedness between markets. A single bullet may never reach Egypt, yet its economic consequences can still be felt through higher oil prices, rising import costs, shifts in investor behaviour, and ultimately movements in the exchange rate. Building an economy capable of withstanding shocks therefore does not depend on preventing crises—something no country can fully control. Rather, it requires building strong foreign exchange reserves, maintaining balanced monetary and fiscal policies, and developing a more productive and competitive economy capable of reducing both the duration and the impact of external shocks. This leads to the central conclusion. Geopolitics may generate waves of anxiety across financial markets, but it does not, by itself, determine the fate of a national currency. Ultimately, what matters most is the strength of a country’s economic fundamentals and its ability to absorb external shocks, transforming prolonged crises from enduring threats into manageable challenges. Mohamed Abdel Aal, Banking expert