Global markets concluded the second quarter of 2026 with an uptick in risk appetite, driven by the easing of Middle East tensions, a drop in oil prices, and renewed interest in technology stocks. Investors are now looking ahead to the start of the third quarter, anticipating several key catalysts. Despite concerns about higher US interest rates and persistent inflation, the market's focus has shifted towards AI-driven growth and the upcoming Q3 2026 earnings season.
The US dollar sustained its gains, propelled by expectations that the Federal Reserve will maintain a restrictive monetary policy for an extended period compared to other major central banks. This view was reinforced by a series of robust US economic reports, indicating the need for elevated interest rates. Gold, a non-yielding asset, suffered its weakest month since 2008, pressured by a stronger dollar and rising real yields, as investor sentiment moved away from defensive assets following a reduction in geopolitical risks. The Japanese yen, meanwhile, continued its decline, nearing a four-decade low against the dollar, prompting speculation about potential intervention by Japanese authorities.
Oil prices retreated to pre-conflict levels as tensions eased between the US and Iran and hopes for a ceasefire reduced fears of supply shocks. West Texas Intermediate (WTI) Oil remained muted near the $7.1 price region. Brent crude also saw a decline. The US Dollar Index (DXY) traded neutrally around 101.20 as investors processed mixed US economic data and hawkish comments from Federal Reserve officials like Cleveland Fed President Beth Hammack, who stated that inflation remains too high and further rate hikes may be necessary if price pressures persist. Futures traders are pricing in a 65% chance of a Fed rate increase by September.
The equity market in the US has been buoyant, fueled by optimism surrounding artificial intelligence. This has attracted foreign capital flows into the US, further bolstering the dollar and reinforcing the narrative of "US exceptionalism." Technology stocks experienced a rebound as investors capitalized on the recent AI-led dip. Asian equities also completed a record-breaking quarter. Looking ahead, investors are positioning themselves for the US non-farm payrolls report later this week, which is expected to be a defining macroeconomic event, especially given that strong labor market readings could further solidify expectations for a tighter Fed policy.
The dollar's strength against the yen is particularly pronounced due to the wide yield gap between US and Japanese rates, favoring carry trades. Japanese authorities previously intervened in April and May, spending 11.7 trillion yen ($72.25 billion) to support their currency, but this impact has since faded. While some analysts believe markets are overestimating the Fed's aggression, with inflation possibly undershooting projections, the current economic data, including resilient consumer confidence and JOLTS openings, continues to support a stronger dollar outlook, especially ahead of Fed Chair Kevin Warsh's Sintra speech and Thursday's jobs data.
