Israeli Shekel Shows Slight Gains as Dollar Nears 2.98 Shekels Amid Volatile Week Ahead

The Israeli shekel traded with slight gains against major currencies on Tuesday morning, while the US dollar strengthened globally against the euro, pound, and yen. In the local currency market, the dollar weakened by 0.1% to 2.982 shekels, the euro dropped 0.4% to 3.397 shekels, and the pound fell 0.3% to 3.946 shekels. Globally, the euro declined 0.3% against the dollar to 1.139, the pound lost 0.2% to 1.323 dollars, and the dollar rose 0.2% versus the yen to 162.22. The dollar index, measuring the currency's value against a basket of leading currencies, increased by 0.3% to 101.18 points.

Ofer Klein, head of economics and research at Harel Insurance and Finance, highlighted a five-day window of potential high volatility in the shekel-dollar exchange rate due to upcoming key events. These include the US employment report on Thursday, the Bank of Israel's interest rate decision on Monday, and the release of economic forecasts. Klein noted this will be the first rate decision after the ceasefire with Iran and a sharp drop in oil prices.

Klein forecasts a 25 basis point rate cut by the Bank of Israel, from 3.75% to 3.50%. He emphasized that the critical message will come from the research division's forecasts and the governor's press conference rather than the rate cut itself. Supporting the rate cut are lower inflation expectations derived from capital markets, which have fallen to 1.5%, below the midpoint of the stability target, and a roughly 10% drop in oil prices since the previous decision.

However, Klein expects the rate cut to be limited to 0.25% due to three factors: a roughly 1% depreciation of the shekel in the past two weeks, increased economic risk premiums, and a still-tight labor market. He anticipates the updated forecast will show interest rates between 3.00% and 3.25% over the next 12 months and inflation forecasts between 1.7% and 1.9%, lower than previous projections due to falling energy prices. The main risk is a hawkish tone from the committee; if the governor stresses "measured and gradual" steps and signals this is a one-time cut rather than the start of a rate-cutting cycle, long-term yields could rise.