The Egyptian pound has pared its losses after sharp falls against the dollar on Wednesday in a sign that, just like 2016, the currency may have overshot. The central bank may sense an opportunity to keep the currency weak in a bid to rebuild its FX reserves but that would risk being misinterpreted as a return to tightly managing the currency. Regardless, the weaker pound will continue to push inflation higher which, if signs of social unrest were to emerge, could test the government’s resolve to keep fiscal policy tight. If officials were to renege on the shift to a flexible exchange rate and/or try to loosen fiscal policy, an investor backlash would quickly ensue.
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