Shekel's rollercoaster ride: Navigating Moody's downgrade and inflation reading

The shekel has been facing a turbulent time in recent months due to various factors such as legal reform and protests, which have impacted its exchange rate against other major currencies. The euro, for instance, has reached a two-year high and crossed the 4 shekel mark, while the dollar has gained strength against the shekel by more than 4% since the start of the year.

Despite the increase in stock indices in the United States, which would typically lead to a strengthening of the shekel, the currency weakened by about 3.2% against the basket of currencies. This was before Moody's credit rating was published, causing further uncertainty in the market.

Moody's downgrade has caused concern among traders and investors, but some are optimistic about the potential movement of the shekel. The reason is that the actual downgrade was not as severe as expected, and as such, the shekel should strengthen, reversing the last week's losses against the dollar.

However, there are mixed views on the potential movement of the shekel in the coming months. According to Modi Shafferer, chief strategist at Bank Hapoalim, said, "If the coalition and opposition can reach an agreement regarding legal reform, the shekel will likely strengthen sharply. This is because the institutions that Moody's credit forecast indicated had weakened will become stronger, which is vital for the Israeli economy.

On the other hand, Shafferer raises a concern that if negotiations fail, the damage to the institutions will increase, and the shekel may weaken to the level of 3.80 or even higher. This highlights the importance of resolving the issues surrounding legal reform, which is crucial for the stability of the Israeli economy and the shekel's movement.

Furthermore, the latest inflation reading in Israel could also impact the shekel's movement. Though last month the inflation rate increased by 0.4%, its twelve-month rate dropped from 5.2% to 5%. If it maintains this level, the Bank of Israel will have to continue increasing interest rates, which could attract foreign investors and cause the shekel to strengthen.

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