Global equity market profiles have shifted substantially in the second quarter, introducing new trends not present in the first three months of the year. The energy supply crunch initiated by the war in the Middle East has been a turning point for central bank policy. That divergence is playing an important role in the performance of forex pairs, and will likely be influential in the coming weeks and months.
Higher energy costs have had different effects on the global economies. Most of the petroleum produced in the Persian Gulf went to Asia, with Australia relying on refineries in Singapore. However, Asia has been better able to find alternative sources than Europe. This has allowed Asian markets to recover quickly, while European finances face greater challenges. This has left emerging markets and even commodity currencies better positioned than the Euro and the pound.
Are Stock Markets Outweighing Central Banks in Forex?
Normally, central banks play the biggest role in shifting currency markets by setting monetary policy. However, broad market moves can also influence currency pairs if there is sufficient capital flow. This can become particularly apparent when the central bank is dealing with a contradictory situation: Stagflation.
Normally, when the economy speeds up, inflation rises as money circulates faster. The central bank responds by raising rates to “cool” economic growth and stabilise prices. This generally supports the currency because higher interest rates attract investors and, in tandem, coincide with investors buying into a rising stock market.
How Stocks Can Influence Forex Markets
When the economy is growing slowly and inflation is rising, the stock market tends to underperform. If this is a global phenomenon, then investors buy bonds, thereby lowering debt yields. However, the money stays inside the country, so the impact on forex is minimal.
However, if the economy is in a bad position while other countries are seeing growth, investors will sell stocks and buy a different currency to invest in that other stock market. This depresses the currency in favour of the other. This was one of the main drivers of the Euro’s strength in 2025, as investors sold US stocks to buy European stocks.
Not All Rate Hikes Are the Same
For countries facing slow growth and high inflation (stagflation), this means the central bank will likely raise rates to maintain currency stability. It will, however, come at the cost of slower growth and a falling stock market. This means that even if rates increase, the currency could weaken as investors move into another currency to find better returns on their stock portfolios.
Up until the war in the Middle East started, the general dynamic was for central banks to ease amid slower economic growth. Hikes and cuts would have the normal effect on the respective economies. But now that some countries are seeing growth (Americas, Asia), while others are seeing slowing growth (Europe, primarily), then the opposite logic can apply. For this reason, the Euro, pound and even the Swiss franc can come under increased pressure as energy prices remain high.
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