While the Bank of Israel’s monetary policy has largely mirrored that of other developed nations in terms of its level of accommodation, the Israeli Shekel looks set to continue rising against the US dollar despite the possibility of a US rate hike. Although the dollar may seem more important on balance thanks to its status as the world’s reserve currency, a rate hike may not necessarily spell a big rally for the USDILS pair. Thanks to offshore gas discoveries and several potentially lucrative regional deals for energy, the small little Middle-Eastern nation could soon be a net energy exporter. Furthermore, as a potential commodity economy, the currency’s fortunes may be closer tied to rising and falling gas prices. If the export situation changes, they may even eventually compete with Russia for Europe’s gas business. Taken in context, ongoing Shekel strength might continue unabated considering the high growth potential lying ahead.

Commodity Currency Status

Israel has long been revered for its status as a global technology hub and hi-tech exporter.Besides technology, a burgeoning agricultural export sector and recently advanced energy production bolster the nation’s trade. However, the offshore discoveries of natural gas are some of the largest finds of the 21stcentury, potentially covering the nation’s energy requirements for decades to come and helping to enhance the nation’s energy security. The beauty of the latest developments is warming ties with neighbors, especially nations Israel is already at peace with like Egypt and Jordon, reducing political risks for the currency. In a deal announced over the weekend, Israel is now set to now export $10 billion worth of gas to Jordan over the next 15-years, helping to cement its status as a regional energy player. The result is a considerable factor that could deliver further strength to the Shekel.

From a policy standpoint, the Bank of Israel is unlikely to move much on interest rates despite deflation that currently stands at a -0.70% annualized pace. With interest rates at 0.10%, policymakers are banking on a US rate hike to temper strength in the Shekel. Weakness in the currency may help bring inflation back into positive territory, but gas may derail the realization of those goals. Although a December rate hike in the US could certainly derail Shekel strength, part of the recent gains may be attributed to the growing energy influence and economic activity, with GDP advancing at a 4.00% annualized pace. Nevertheless, a near-term lack of action on the part of the Fed may see the Shekel approach a breakout versus the US dollar on the back of sustained economic momentum.

Technically Speaking

From a long-term perspective, the USDILS pair has been consolidating for approximately nine years in a symmetrical triangle formation. This pattern indicates that sooner or later, a breakout move is approaching, especially if trading volumes and volatility fall from current levels. Taking a closer look, the pair has been consolidating within a descending triangle pattern over the last two years. Formed by support at 3.7500 combined with a downtrend from 2015 highs, the consolidation forms the basis for the bearish bias of the pattern. A candlestick close below this level accompanied by higher trading volumes and momentum would strong indicate a breakout towards the next support level at 3.6850. However, should the trend line be broken to the upside, it would indicate a breakdown in the pattern and potential reversal to the upside.

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Adding to the downward bias in the USDILS pair are the moving averages which are trending lower above the price action. They could prevent any upside bounce in USDILS by acting as resistance. However, should the moving averages be broken to the upside, it increases the likelihood of an upside reversal and furthermore a test of the downward trend line in the region of 3.8500-3.8600. The upside case could also be bolstered by a signal line crossover in the stochastic oscillator as the pair approaches the oversold territory of the relative strength index. Although not yet below the 30.00 level that suggests USDILS is undervalued, the current stretch of downward momentum may finding itself decelerating as it approaches critical longer-term support at 3.7350.

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Looking Ahead

As far as major upcoming news for the Israel Shekel, the only item of major importance is GDP and inflation figures due in the middle of October. Although growth is expected to see another upgrade, helping the Shekel strengthen, deflation is forecast to persist over for the time being on both a monthly and annualized basis. The true momentum in the USDILS pair will most likely be a function of the final second quarter US GDP reading to be delivered later in the week. Should growth fail to match the prior reading, it could spell further downside in the US dollar and reduce the probability of a December rate hike. However, should GDP beat expectations, it might fuel increased speculation, helping to boost the dollar versus the Shekel over the short-term.Nevertheless, the December decision still looms large of the USDILS despite the downside breakout potential.