Geopolitical Tensions and Inflation Data to Shape Israeli Shekel and US Markets This Week

This week’s trading is set against heightened geopolitical tensions following Iran’s announcement to close the Strait of Hormuz, a response to recent US and Gulf states’ attacks. Investors will closely monitor the impact of these developments on global markets, especially oil prices, which surged over 4% amid the conflict. The Israeli stock market ended last week in correction territory, with the TA-35 index down 1.7% and the defense sector falling 5.2%, while US markets showed resilience, led by tech stocks and AI-related companies.

In the US, the Federal Reserve’s new chair, Kevin Warsh, will testify before Congress following the release of the semiannual monetary policy report. His cautious stance on minimizing market signals adds uncertainty to expectations about future interest rate moves. The US inflation report for June, due Tuesday, is expected to show a slight decline overall but a rise in core inflation, which excludes volatile food and energy prices, keeping inflation concerns alive.

In Israel, the June consumer price index is forecasted to show continued inflation moderation to around 1.6%, within the Bank of Israel’s target range. However, analysts warn that the shekel’s recent weakening and geopolitical risks may limit its strengthening potential and could exert upward pressure on inflation in coming months. Bank stocks in Israel gained last week, seen as a safe haven amid regional tensions.

Morgan Stanley highlights three main risks that could prevent a summer rally on Wall Street: escalation of the Iran conflict, potential Fed interest rate hikes, and reduced capital spending in the AI sector. Despite a historically strong July for US equities, these factors pose significant downside risks. The recent strong performance of AI-related stocks and the largest-ever US IPO by South Korean chipmaker SK Hynix underscore the sector’s importance but also its vulnerability.

Overall, markets face a complex interplay of geopolitical, monetary, and sector-specific factors this week, with key inflation data and Fed testimony likely to influence investor sentiment and the trajectory of the Israeli shekel and US equities in the near term.