China’s economy expanded by 4.3% year-over-year in the second quarter of 2026, falling short of the market consensus of 4.5% and slowing from 5.0% in the previous quarter, according to official data from the National Bureau of Statistics (NBS) released on Wednesday [1][2][3]. On a quarterly basis, GDP grew 0.9%, matching market expectations but decelerating from 1.3% in Q1 [1][2][3]. This marks the weakest annual growth since 2022 and is below China’s full-year growth target range of 4.5% to 5.0% [1].
Despite the disappointing GDP figure, other Chinese economic indicators showed mixed results. Retail Sales rose by 1.0% year-over-year in June, reversing a -0.6% decline in May and beating the expected -0.1% [1][2][3]. Industrial Production increased by 5.3%, surpassing both the 4.6% forecast and May’s 4.5% reading [1][2][3]. However, Fixed Asset Investment dropped 5.7% year-to-date in June, a steeper decline than the 4.9% expected and the previous 4.1% fall [2][3].
The release of China’s economic data had immediate but nuanced effects on global currency markets. The Australian Dollar (AUD) extended gains for a second day, with AUD/USD trading around 0.6980–0.6988, as the AUD benefited from both the Chinese data and a weaker US Dollar following softer-than-expected US inflation [2][3]. The New Zealand Dollar (NZD) remained firm above 0.5800, with NZD/USD trading near 0.5825, showing little reaction to the mixed Chinese data [1]. The Canadian Dollar (CAD) climbed to a four-week high against the USD, supported by rising oil prices amid escalating US-Iran tensions and the closure of the Strait of Hormuz [4]. The Japanese Yen (JPY) edged higher versus the USD, but gains were limited by ongoing Middle East risks and the wide US-Japan interest rate differential [5].
US inflation data released Tuesday showed the Consumer Price Index (CPI) declined 0.4% in June, more than the 0.1% fall expected, and the largest monthly drop since April 2020 [2][4][5]. This prompted traders to scale back expectations for Federal Reserve rate hikes, with the CME FedWatch Tool showing the odds of a July hike dropping to 16% from 42% earlier in the week, and the probability of a hike this year at 80%, down from 89% [1][2]. Markets are now pricing in a roughly 50% chance of a Fed rate hike in September [2].
Geopolitical tensions in the Middle East, particularly between the US and Iran, have driven oil prices to a one-month high, supporting commodity-linked currencies like the CAD and raising concerns about energy-driven inflation [4][5]. US President Donald Trump warned of further strikes against Iran unless negotiations resume, maintaining a geopolitical risk premium in markets [4][5].
Looking ahead, market participants are focused on upcoming events including the US Producer Price Index (PPI) report, the Bank of Canada’s interest rate decision, and further testimony from Fed Chair Kevin Warsh, all of which could provide additional direction for currency and commodity markets [1][2][4][5].
CONCLUSION
China’s weaker-than-expected Q2 GDP growth has underscored concerns about the global economic outlook, but mixed Chinese data and softer US inflation have led to divergent moves across major currencies. Commodity-linked currencies like the AUD and CAD have found support, while the USD remains under pressure amid reduced Fed rate hike expectations. Geopolitical risks and upcoming central bank decisions remain key drivers for market sentiment.