Global investors entering the second half of the year find themselves caught between two competing geopolitical narratives: the fading optimism of the "TACO" (Trump Always Chickens Out) playbook, and the stark, disruptive reality of "NACHO" (Not A Chance Hormuz Opens).
As markets adjust to a more volatile reality, the illusion of predictable American economic coercion is giving way to a protracted conflict in the Middle East, just as a stark divergence opens between the world's major central banks.
In the wake of Operation Epic Fury, Wall Street is experiencing a sharp awakening. For months, the prevailing market assumption was that President Donald Trump’s bellicose tariff threats were merely high-stakes leverage tools, an "escalate to de-escalate" strategy designed to wring concessions from trading partners before ultimately backing down.
However, a kinetic military conflict operates on a fundamentally different axis of power than a trade war. While Washington can choke off international market access to enforce its will commercially, it has met its match in Tehran. Iran has demonstrated both the political will and the structural capacity to endure extreme economic pain to maintain its strategic stranglehold on the Strait of Hormuz.
The June Memorandum of Understanding was supposed to offer a diplomatic off-ramp. Formulated behind closed doors via third-party channels, the MOU attempted a transactional "assets-for-access" swap. Washington would temporarily unfreeze specific Iranian assets in exchange for both navies standing down their vessels in the Strait. Deep-seated mutual distrust has exposed the fragility of this diplomatic truce.
As the threat of collapsing talks looms, market sentiment has shifted from cautious optimism to open anxiety. While this has triggered a resurgence in global oil prices, a wholesale rerun of the acute panic that caught markets flat-footed in March-April is also unlikely after months of adjustments to continuous maritime friction.
Against this volatile geopolitical backdrop, the coming fortnight may underpin the EUR, driven by a market preference for the European Central Bank’s new and transparent Framework Guidance over Fed Chairman Kevin Warsh’s campaign to end forward guidance.
The ECB has flagged a tactical pause at its governing council meeting on July 23. However, the market is currently pricing in an 87.8% chance of a 25-bps hike to 2.50% at the subsequent September 10 meeting. If the ECB affirms this trajectory, the EUR/USD pair could break above this month’s tight range of 1.1360 to 1.1480.
Conversely, Warsh’s testimony to US lawmakers last week confirmed his intention to restore an "uncertainty premium" to the market’s pricing for a September hike. Warsh plans to use the July 28-29 FOMC meeting to foster an "honest internal discussion" with his colleagues at the Fed. Markets will become anxious that slashing the FOMC statement and Warsh’s refusal to provide his own forecasts at his first FOMC meeting in June could be a prelude to stripping the dots and the Summary of Economic Projections of their market-moving authority at the September meeting.
We have lowered our end-2026 forecasts for USD/KRW to 1450 from 1485 previously.
First, we now see the Bank of Korea delivering two instead of one rate hike for the rest of 2026, following last week’s hawkish 25-bps increase in the base rate to 2.75%.
Second, the USD/KRW has fallen from 1560 to 1490 so far this month, decoupling significantly from USD/JPY, which has held firm around 162.
Third, the Ministry of Finance and Economy and the Bank of Korea have executed major regulatory rollbacks in the capital market and foreign exchange reforms to improve market accessibility after MSCI denied South Korea an upgrade to its Developed Market watchlist in June.
Quote of the Day
“That's one small step for a man, one giant leap for mankind.”
Neil Armstrong
July 20 in history
Neil Armstrong became the first human to walk on the Moon in 1969.
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