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Global FX markets spent Q2 2026 repricing the world’s central banks. What started as a war-driven oil shock became an inflation shock, and by mid-June every major central bank had either hiked rates or signalled one is coming. The dollar came out on top, gold got crushed, and the yen fell to levels last seen in 1986.

The quarter in Global FX markets

The US Dollar Index closed Q2 at 101.19, up 1.2% over the quarter. That gain understates the dollar’s gravitational pull: the greenback strengthened against every G10 currency except sterling, which managed a slim 0.6% gain in GBP/USD to 1.3254, and the Australian dollar, which eked out a 0.5% rise to 0.6882. EUR/USD slipped 0.3% to 1.1422. The commodity bloc was hit hardest — USD/NOK and USD/CAD both rose 2.0%, and USD/SEK gained 1.6%.

The dominant theme was straightforward: the Iran-war energy shock fed directly into inflation expectations, forcing central banks to pivot hawkish in unison. That monetary repricing was bullish for the dollar and lethal for rate-sensitive assets. Gold collapsed 13.4% to $4,022.90 — its steepest quarterly drop in years — as real yields climbed. Oil gave back its war premium hard, with WTI falling 31.4% to $69.50 and Brent dropping 38.4% to $72.92 as ceasefire talks progressed and demand destruction set in.

Winners and losers

The standout loser was the Japanese yen. USD/JPY closed the quarter at 161.92, up 1.3%, but the move understates the pain: the pair pushed through 160, a level that triggered intervention in late April — the first yen-buying operation by Tokyo since July 2024 — and kept grinding higher. A 300-basis-point rate gap between the Fed and the BoJ continues to fuel carry-trade flows, with Morgan Stanley estimating roughly $500 billion in outstanding yen carry positions globally. The Scandinavian currencies also underperformed, with the Norwegian krone and Swedish krona losing 2.0% and 1.6% against the dollar respectively, weighed down by the oil pullback and Europe’s proximity to the energy shock.

On the crosses, GBP/JPY surged 1.9% to 214.59 — the clearest expression of the “short yen, long yield” trade. EUR/CAD gained 1.7%, and AUD/JPY climbed 1.8% to 111.43 as the Australian dollar held up better than most, supported by copper’s 10.8% rally. Sterling was the relative winner among European currencies: EUR/GBP fell 1.0% to 0.8614 as UK inflation stuck above the Bank of England’s comfort zone while eurozone growth stalled.

What drove Q2 2026

Three forces shaped the quarter. First, the Iran-war inflation transmission. The Strait of Hormuz disruption that began in late February sent oil to $138/bbl in early April — the highest since June 2022 — and even after the mid-April ceasefire brought prices back below $100, the inflation damage was done. The World Bank forecast energy prices to surge 24% for the full year.

Second, a synchronised hawkish pivot. The Fed held rates at 3.50–3.75% for a fourth straight meeting on June 17 but flipped its dot plot to signal a possible hike, with the median year-end projection at 3.8%. The ECB hiked 25 basis points on June 11 — its first increase in three years — taking the deposit rate to 2.25% and revising 2026 headline inflation to 3.0%. The BoJ raised its policy rate to 1% on June 16, the highest since 1995. The Bank of England held at 3.75% but saw its hawkish minority double from one to two dissenters.

Third, the gold-dollar paradox. War typically sends gold higher, but this time the inflation response dominated. Markets priced out rate cuts, priced in hikes, and the dollar rallied — leaving gold as a casualty of its own traditional catalyst.

Q3 2026 outlook

The setup heading into Q3 is hawkish and uncertain. Markets are pricing a possible Fed rate hike as early as October, and the ECB has left the door open for a second increase. The BoJ signalled it will “continue to raise the policy interest rate” — another 25 basis points at the July 30 meeting would take Japan to 1.25% and begin to narrow the carry-trade gap that has punished the yen.

The calendar is loaded. Four major central banks meet within eight days: the ECB on July 23, the FOMC on July 28–29, and the BoJ and BoE both on July 30. A second cluster arrives in September with the ECB (Sep 10), FOMC (Sep 15–16), and BoJ (Sep 17–18). Each meeting will test whether the hawkish repricing has gone far enough or whether oil-driven inflation forces further tightening.

USD/JPY near 162 is the pair to watch for intervention risk — Tokyo has shown its hand once already this year, and the BoJ’s rate path will determine whether the yen carry trade unwinds or extends. EUR/USD at 1.1422 faces a tug-of-war between ECB tightening and the eurozone growth drag that the World Bank flagged as a recession risk for Germany and Italy. Copper’s 10.8% Q2 gain could extend if China stimulus materialises, keeping AUD supported, but oil’s trajectory will dominate the commodity-linked currencies.

What we’re watching

Four things will define Q3 for Global FX. First, the Fed’s July 28–29 meeting and whether Chair Warsh escalates the hike signal from the dot plot into forward guidance. Second, the BoJ’s July 30 decision — another hike narrows the carry gap and could trigger yen short-covering. Third, oil: a ceasefire collapse re-opens the Strait of Hormuz risk premium and resets the entire inflation calculus. Fourth, EUR/GBP divergence — the ECB has hiked, the BoE has not, and the next three months will test whether that gap widens or closes.