"The window of opportunity for a cut may close"; dollar at 2.99 shekels, market awaits interest rate decision

The foreign exchange market is showing a mixed trend this morning, with the dollar strengthening against the shekel while the euro and the pound are weakening. On the international scene, the dollar is recording a moderate strengthening against some of the major currencies, and the dollar index is climbing slightly. Investors in the local market are awaiting the Bank of Israel's interest rate decision, which will be published today at 16:00.

In recent days, assessments for an interest rate cut have been increasing in light of inflation data that allow for it, but there is still no certainty, and the possibility of keeping the interest rate unchanged — at a rate of 3.5% — is also perceived as reasonable. The dollar is strengthening by 0.2% and reaching 2.989 shekels, the euro is weakening by 0.4% and stands at 3.469 shekels, the pound is losing 0.4% and moving around 4.049 shekels.

In global markets: the euro is weakening by 0.1% against the dollar to a level of 1.161, the pound is recording a decline of less than 0.1% and stands at 1.355 dollars, the dollar is strengthening by 0.1% against the yen and reaching 159.88 yen. The dollar index, which measures the value of the currency against a basket of leading currencies, is rising by 0.1% to a level of 99.443 points.

"The wind blowing from Jackson Hole does not support an interest rate cut in Israel, but on the other hand, the inflation data allow it, and the window of opportunity for a cut may close later on," wrote economists at Bank Hapoalim, in a review that referred, among other things, to the speech by Federal Reserve Chairman Kevin Warsh on Friday at the central bankers' conference in Jackson Hole.

Warsh provided a hawkish tone and hinted that he would support raising the interest rate in a scenario where inflation does not moderate.

"In any case, the markets do not see a continuous process of interest rate reduction, but rather a stabilization of the interest rate after one cut at a level of 3.25%," wrote Bank Hapoalim.

Inflation expectations are stable at a level of about 1.8% for the next two years; this figure seems low relative to the wage increase in the economy, and to the assessments that the new government to be formed will be forced to make fiscal adjustments that could be reflected in price increases. On the other hand, we have seen in the last year a significant moderation in the rise of prices for various services, even though wages continued to rise at a very fast pace of about 7%. If this gap mostly reflects an increase in labor productivity, then it can justify inflation expectations that are lower than 2% over time. Otherwise, we would expect inflation expectations that are higher than 2%. We forecast inflation at a rate of 2.0% in the next 12 months.