Slight retreat in the shekel at the start of inflation week: dollar at 3.00 shekels

The week begins with a slight retreat in the shekel. On Wednesday, the Consumer Price Index for July will be published in the USA, followed by the parallel price index in Israel on Friday.

The dollar is rising by 0.2% to trade at 3.00 shekels, while the euro is up 0.2% at over 3.47 shekels. In global markets, the dollar index against a basket of leading currencies is up 0.2% to 99.7 points. The euro remains stable above 1.15 dollars, the pound is trading just below 1.35 dollars, and the dollar is rising by 0.3% against the Japanese yen to 158.2 yen.

Inflation data in Israel, to be released on Friday, will be the final indicator before the Bank of Israel's next interest rate decision on September 1, with the current rate at 3.5%. Economists at Leader, led by Yonatan Katz, note that Governor Amir Yaron and the Monetary Committee face a difficult decision:

"From the Bank of Israel's perspective, there are conflicting trends: on one hand, low inflation expectations and damage to industry due to the strengthening of the shekel support a reduction in the interest rate. On the other hand, the return of the economy to full activity (except for the hotel sector) while there is a severe shortage of workers supports a cautious monetary policy — the pressure for wage increases is a real inflationary risk."

They add that despite the shekel's 0.7% strengthening against the currency basket last week and falling oil prices, they still forecast 2.1% inflation for the coming year. Given these expectations, a reduction in the Bank of Israel's interest rate below 3.25% seems unlikely.

In the USA, the impact of Friday's weak employment report on Fed policy remains under scrutiny. The July outlook will be finalized with this week's inflation data; a downside surprise could significantly reduce the likelihood of a near-term Fed rate hike.

"The weak employment report in the USA changed the picture in the markets and reduced the fear of another interest rate hike as early as September. Now the center of gravity is moving to the inflation data: if they also point to a moderation, this may strengthen the assessment that the Fed will be able to remain on hold," said Yossi Menashe, founder and co-CEO of Altshuler Shaham Financial Services.

"On the other hand, a surprise to the upside in the price index could change interest rate expectations again and support a recovery of the American currency," Menashe added.