Markets Await Fed Signal: Dollar Stable at Around 3.06 Shekels

A slight rise is recorded this morning in the local foreign exchange market, while in the international arena the dollar is trading stably against a basket of leading currencies and trading movements in major currencies are moderate. The dollar is strengthening by 0.1% and is trading at 3.062 shekels. The euro is recording a 0.1% rise to 3.479 shekels, and the pound is also climbing by 0.1% to a level of 4.068 shekels.

In the international foreign exchange market, the euro and the dollar are stable and trading at 1.137 dollars per euro, the pound is recording a minimal decline to 1.329 dollars, and in Japan the dollar is also stable at a level of 163.76 yen. The dollar index, which measures the value of the currency against a basket of leading currencies, is recording a slight movement and stands at 101.37 points. The market is following developments in the war in Iran and is awaiting the interest rate decision in the USA to be published tomorrow.

On the geopolitical front - although Tehran denied reports that it had agreed to a ten-day ceasefire with the USA, a temporary lull in the fighting is currently being maintained on the ground. Although the cessation of American strikes in Iran led to a decline in oil prices and somewhat reduced concerns about inflation, US government bond yields declined only moderately compared to movements recorded in other markets overnight. "The lack of significant demand at the short end of the yield curve helped keep support for the dollar," said Chris Weston, head of research at the investment house Pepperstone.

Senior officials of the US central bank, the Federal Reserve, will begin the two-day policy meeting today and at its conclusion tomorrow will publish the second interest rate decision under the new chairman Kevin Warsh. A growing number of large investment houses believe that there is a possibility that the central bank will raise the interest rate as early as this week, against the backdrop of the jump in oil prices during the month and the escalation of tensions in the Middle East. According to the CME's FedWatch tool, the markets are pricing in a 37.9% probability of an interest rate hike of at least 25 basis points in the upcoming interest rate decision, compared to only 16% a week ago. In addition, investors are pricing in a probability of almost 81% for an interest rate hike at the September meeting.

"If the Fed surprises and raises the interest rate, this is expected to support the dollar. We may see new highs and continued strengthening of the American currency, especially against low-yield currencies like the Japanese yen and the Swiss franc," said Mahjabeen Zaman, head of FX research at ANZ Bank. Later in the week, investors will also follow the growth data of the US economy in the second quarter and the Core PCE index, the Federal Reserve's preferred inflation index, to get an updated picture of the state of the world's largest economy.

The Bank of England and the Bank of Japan are expected to leave interest rates unchanged in their decisions on Thursday and Friday, respectively, while maintaining a cautious approach regarding inflation. After the yen traded last week near a 40-year low against the dollar, the assessment is that the Bank of Japan will leave the door open for further interest rate hikes to curb the weakening of the currency, although policymakers are expected to avoid a clear commitment regarding the timing and pace of the moves. So far, verbal attempts to support the yen have had limited impact. "Assuming the interest rate does not change, we believe the Bank of Japan will need to adopt a relatively hawkish tone to convince the markets that it is committed to both achieving the inflation target and supporting the yen," said Matthew Ryan, head of market strategy at the financial services company Ebury.

In an interview with Reuters NEXT, Japan's Finance Minister Satsuki Katayama reiterated today the government's position that Tokyo will act in the foreign exchange market as needed, adding that as she understands it, Washington also shares this approach. Katayama refused to comment on the possibility of a joint intervention by Japan and the USA to purchase yen, adding that a weak currency has both advantages and disadvantages for the economy.