Financial markets are wrapping up a third consecutive winning week, with the S&P 500 climbing 1.85% over the last five trading sessions to close at 756.48 — the longest weekly win streak since 2023. Behind the rally: hopes for a diplomatic resolution in the Strait of Hormuz driving oil prices sharply lower, and growing expectations that the Federal Reserve will ease monetary policy.

The 10-year US Treasury yield fell for five straight sessions to 4.45%, after opening the week at 4.59%. The 2-year yield dropped to 3.80% — a decline of more than 50 basis points in a week — reflecting rising expectations for a Fed rate cut. Fed funds futures (ZQ=F) now show increased probability of a 25-basis-point cut in the coming months.

On the FX front, the US Dollar Index (DXY) edged lower to 98.91, extending a four-day losing streak. The euro firmed against the dollar to trade around 1.166, a slight gain from last week's close. Markets are pricing a growing divergence between Fed and ECB policy, with eurozone inflation proving stickier and the European Central Bank signaling caution.

Israel in focus

The shekel continued its sharp rally against the dollar, trading around 2.814 — its strongest level in months — after a 2.6% drop in USD/ILS since the start of the week. Against the euro, the shekel traded near 3.286, with the euro weakening more than 2% versus the shekel this week. The rapid appreciation may help curb imported inflation but poses a challenge for the Bank of Israel, which generally prefers FX stability.

Unlike the Fed, the Bank of Israel has not signaled any intention to cut rates in the near term. Israeli inflation recently edged above the 3% upper bound of the target range, and the strong shekel adds complexity to the policy calculus. Analysts expect the central bank to hold rates steady at its next decision.

Across the Atlantic

The ECB, led by Christine Lagarde, continues to tread carefully. Eurozone inflation remains above target, and the central bank fears that cutting rates too early could reignite price pressures. European government bond yields have remained relatively stable, with the spread against US Treasuries narrowing.

The bottom line

This week presents a mixed picture in macro markets: on one hand, growing expectations for a Fed rate cut are supporting equity markets; on the other, inflation in Europe and Israel continues to constrain policymakers. The strengthening shekel is a standout local story, and the trajectory ahead will depend largely on the next moves from the Fed and the Bank of Israel in the weeks to come.