USD/KRW retreated towards 1,500 after briefly moving above 1,510, as the Bank of Korea kept policy steady but adopted a more hawkish stance. The Kospi fell as much as 5% before paring the decline to around 1%. The BoK held the base rate at 2.50% for an eighth consecutive meeting and guided that its next move is likely to be a hike, while two of the seven Board members voted for a 25bp increase.
The central bank also upgraded its 2026 projections, lifting real GDP growth by 0.6ppt to 2.6% and raising its CPI forecasts, with headline inflation up 0.5ppt to 2.7% and core up 0.3ppt to 2.4%. On valuation, the won is more than 11% below its real effective exchange rate trend, the deepest discount since 2009, and that gap is projected to persist until the current energy shock eases.
BoK Policy And Won Valuation Dynamics
We are watching the USD/KRW pair consolidate near the 1380 mark, a level that reflects broader US dollar resilience. The Bank of Korea’s recent decision to hold its policy rate at 3.50% is providing critical support for the won. This has created a tense balance, suggesting that a significant directional move may be unlikely in the immediate short term.
The central bank’s hawkish tone is justified by persistent inflationary pressures, with the latest consumer price index for April 2026 showing a 2.9% year-over-year increase. This is still well above the BoK’s 2% target, reinforcing the market view that any discussion of rate cuts is premature. We believe the BoK’s next move is still more likely to be a hike than a cut, which should limit the won’s downside.
Fundamentally, the won appears significantly undervalued, with its real effective exchange rate still near lows not seen since the 2008 financial crisis. This undervaluation is being prolonged by the ongoing energy shock, as South Korea remains a major energy importer. Brent crude prices hovering near $88 a barrel continue to weigh on the country’s terms of trade and cap the won’s potential appreciation.
Strategic Positioning In The Currency Pair
For the coming weeks, we see an opportunity in selling short-dated USD/KRW call options with strike prices above the 1400 level. This strategy allows us to collect premium based on the view that the BoK’s hawkish stance will form a ceiling for the currency pair. It is a cautious approach that benefits if the pair remains range-bound or if the won gradually strengthens, while defining our risk to the upside.
