The shekel-dollar exchange rate experienced a volatile trading week characterized by a tug-of-war between strong domestic economic fundamentals and renewed regional anxieties. While the shekel demonstrated significant strength for most of the week—pushing the dollar to five-day lows around 3.06—a sharp correction on Friday suggests that investors remain highly sensitive to geopolitical headlines emerging from Washington and Tehran.

Shekel Strength Meets Technical Support

For the majority of the week, the Israeli currency outperformed, driven by the lingering positive sentiment from the Bank of Israel’s aggressive monetary easing cycle. With the interest rate now at 4.00% following two consecutive cuts, and the central bank forecasting robust GDP growth of 5.2% for 2026, foreign and domestic capital has flowed back into the local market. This “peace dividend”—following the ceasefire agreement—anchored the USD/ILS pair below the psychological 3.10 handle for most of the trading sessions, reflecting a market pricing in a rapid economic recovery.

Geopolitics Trigger Friday Jitters

The sentiment shifted abruptly on Friday, as the greenback staged a 0.49% rally to reclaim the 3.09 level. This reversal coincides with reports of high-level diplomatic meetings in Washington regarding Iranian missile threats, reminding investors that the regional security premium has not entirely evaporated. The sudden bid for the dollar—a classic “safe-haven” move—indicates that while the economic outlook is bright, the geopolitical floor for the pair remains elevated. Traders likely trimmed their short-dollar positions ahead of the weekend to hedge against potential developments on the security front.

Looking Ahead: The February 23rd Decision

Investors are now shifting their focus to the upcoming Bank of Israel interest rate decision scheduled for February 23, 2026. With inflation moderating to 2.4% and the economy showing signs of resilience, the central bank faces a dilemma: continue cutting rates to stimulate growth or pause to defend the shekel against renewed volatility. The market will be closely watching whether the shekel can maintain its structural appreciation trend or if this week’s 3.06 support level marks a short-term bottom.

As we move into next week, volatility is expected to persist. Traders should monitor the 3.10 resistance level; a sustained break above this could signal that geopolitical risks are beginning to outweigh the positive macroeconomic data. Conversely, if the security situation remains contained, the shekel’s yield advantage and Israel’s growth story could drive the pair back toward the 3.05 range.