The Chicago Mercantile Exchange (CME) reported an 18% increase in global forex trading volumes, which reached a record high in Q2 2025. The substantially higher interest may have been triggered by the global currency market’s volatility, as this presents more attractive trading opportunities.
The interplay of several factors induced volatility in the forex market in 2025.
Central Bank Interest Rate Policies
Benchmark rates directly impact currency valuation. Most global central banks cut interest rates through the first two quarters of 2025:
- Bank of England cut rates from 4.75% to 4.5% in February and to 4.25% in May.
- Reserve Bank of Australia cut rates to 4.10% in February and to 3.85% in May.
- European Central Bank (ECB) reduced rates from 2.50% to 2.25% in April and to 2% in June.
The exceptions:
- US Federal Reserve held a higher-for-longer stance.
- Bank of Japan raised its interest rate for the first time in 17 years to 0.05% in January.
Trade War
Tariff threats by the US caused significant volatility in the forex markets. During the second quarter, the US was in active trade talks with the UK, Canada, China, and Japan. On July 24, Trump said tariffs could be anywhere between 15% and 50%.
Tariffs tend to have:
- Inflationary impact on the country imposing it (US in 2025).
- Trade imbalances between imposing country and target country.
Geopolitical Tensions
An escalation in geopolitical tensions typically drives safe-haven demand. However, in 2025, the world’s main reserve currency came under threat.
- USD declined as the US dived into the Iran-Israel conflict.
- JPY and CHF surged on alternate safe-haven demand.
- CAD came under pressure due to election year uncertainties and border tensions with the US (after Trump accused Canada of drug trafficking).
Supply Chain Risks
Heightened conflict in the Middle East and US efforts to increase oil production led to a major shift in demand-supply dynamics.
- JPY was weighed down by risks of supply disruptions.
- CAD and USD remained under pressure due to oversupply risks.
- EUR and GBP came under pressure due to concerns around energy security.
What to Watch
- Interest rate decisions by leading central banks.
- Trade deals between the US and its trade partners.
- Escalations in Middle-East tensions.
- Major economic releases, such as economic growth, inflation and unemployment reports.
Keeping an eye on other factors, such as trade balance and regulatory policy changes, can also help traders make better forex trading decisions amid volatility.
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