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The Bank of Korea (BoK) is expected to keep its policy rate steady at 1.75 percent on Thursday morning. Meanwhile, the South Korean central bank is expected to follow suit on August 30 to spur economic growth, if the Fed lowers the target range for the federal funds rate by 25 bp to 2.00-2.25 percent later this month as expected, according to the latest research report from Scotiabank.
South Korea’s benign inflation outlook and economic slowdown provide scope for the central bank to cut its policy rate in August. The nation’s CPI inflation came in at 0.7 percent y/y in June, unchanged from the prior month’s pace.
On the back of the base effect, the headline inflation will ease again the rest of the year, with risks of falling into deflationary territory in the month of September and October.
In addition, South Korea’s exports have been contracting on year for seven consecutive months, casting a shadow on the nation’s economic growth. In June alone, China’s imports from South Korea plummeting 21.9 percent y/y.
"Apart from fundamentals mentioned above, the KRW will remain susceptible to the Fed’s monetary policy stance, the US/China trade negotiations and the Japan-Korea export talks," the report added.
The Fed’s dovish stance will cap upside room for the DXY Index. Fed Chairman Jerome Powell signaled the first US interest rate cut at the July 30-31 FOMC meeting amid looming economic risks, when testifying before Congress last week.
In addition, the minutes of the June 18-19 FOMC meeting have further raised market expectations of future rate cuts. Chicago Fed President Charles Evans also said on Friday that the US central bank should consider a couple of interest-rate cuts to boost inflation above its 2 percent goal.
"We expect USD/KRW to range trade between 1,150 and 1,200 in the near term, until the US and China make a concrete progress in the trade negotiations and/or Japan lifts its restrictions on tech exports to South Korea," Scotiabank further commented.
