USD/ILS forecast as the Israeli shekel crumbles to a decade low

The Israeli shekel crash continued plummeting as the war against Hamas continued. The USD/ILS exchange rate surged to a high of 4.07, the highest level since June 2009. It has surged by more than 34% from the lowest level in 2022.

The Israeli shekel has been in a strong downward trend in the past few months. The crash started before the current Israel-Hamas war started. Instead, it has been falling during the recent Supreme Court protests in Israel.

It then accelerated after the ongoing war started. Many investors and policymakers are now worried that the situation will get out of hand in the coming days as Israel prepares to launch a bloody ground attack in Gaza.

It then continued on Wednesday after the Bank of Israel delivered its interest rate decision. In it, the bank decided to leave interest rates unchanged as most analysts were expecting. It also lowered the country’s growth forecast from 3% to 2%.

The central bank has vowed to continue supporting the Israeli shekel. As part of this process, the bank will sell up to $30 billion of forex reserves in a bid to boost its value.

The ILS crash happened at a time when the US dollar index (DXY) has strengthened recently. The DXY index has risen in the past three straight months and now sits at $106.77, higher than this week’s low of 99.7.

This happened as the Federal Reserve maintained an extremely hawkish tone. It has already hiked interest rates from zero to a two-decade high of 5.50%. Some Fed officials believe that more rate hikes are necessary.

Higher interest rates have an impact on Israeli’s economy. For one, they have reduced the volume of dollar inflows as the volume of Foreign Direct Investment (FDI) has crashed.

USD/ILS chart by TradingView

The USD to ILS exchange rate continued its uptrend as it jumped to the highest level in over 13 years. It has moved above the key resistance level at 4.06, the highest point since March 16th 215. 

The pair has remained above the 50-week and 100-week moving averages (MA). At the same time, the Relative Strength Index (RSI) and the Stochastic Oscillator moved to the extreme overbought level. 

The exchange rate has momentum for now while its volume is rising. Therefore, I suspect that the momentum will continue but for a short while. This rally could see it jump to the next psychological level at 4.10. 

In the long term, however, I believe that the USD/ILS pair will stabilise as Israel receives billions in foreign aid. In the US, Joe Biden has requested $14 billion for Israel. While most of these funds will be in the form of weapons, others will be in cash. 

Also, as we saw last year, the Russian ruble initially crashed and then rebounded after the invasion of Ukraine. It then bounced back from over 140 to 50 against the US dollar.

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