Global Markets Daily What Could Spark a Reset Higher in FX Vol

Economics Research 30 July 2026 | 4:06PM EDT

Global Markets Daily: What Could Spark a Reset Higher in FX Vol?

n FX volatility has fallen back to historical lows, despite ongoing market uncertainty Karen Reichgott Fishman | around AI, energy prices, and the Fed. Even on a day when the FOMC delivered Goldman Sachs & Co. LLC the biggest non-cut surprise in nearly 30 years, implied vol fell further across G10 currencies. We have previously studied what factors should influence the level of implied volatility in FX markets over time, but lately a different question has become more top of mind: what could spark a reset higher? n We look back at 11 episodes over the past 20 years when FX volatility rose sharply to determine the factors that could disrupt the current low-vol regime. We find that, on average, volatility across equities, commodities, and rates rose by notable and similar magnitudes in those periods. Growth expectations for major economies also deteriorated. n Within the average, the steepness of the reset in FX vol and the broader market backdrop varied by the type of shock. Demand and policy shocks were characterized by broad increases in vol across assets, while supply shocks saw higher, rates-led vol. Liquidity crises saw the sharpest, equity-led increase in vol—with the S&P 500, Euro Stoxx 50, and FTSE 100 each selling off by roughly 30% during those episodes. n Our results suggest that FX vol tends to reset sharply only when vol in other markets also picks up notably, typically coinciding with imminent growth concerns. Our baseline forecasts for continued equity gains, rangebound energy prices, and a dovish Fed imply a continued low-vol backdrop that encourages positioning for carry. But the lingering risks of an end to the AI boom, persistently higher energy prices, and Fed hikes leave clear paths to higher cross-asset vol if any of those materialize. FX can offer cheap protection relative to the much higher implied vol in other assets.

What Could Spark a Reset Higher in FX Vol?

FX volatility has fallen back to historical lows, despite ongoing market uncertainty around AI, energy prices, and the Fed (Exhibit 1). Even on a day when the FOMC delivered the biggest non-cut surprise in nearly 30 years, implied vol fell further across G10 currencies. We have previously studied what factors should influence the level of implied volatility in FX markets over time, but lately a different question has become more top of mind: what could spark a reset higher?

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Exhibit 1: FX volatility has fallen back to historical lows, despite ongoing market uncertainty around AI, energy prices, and the Fed Vol Vol 30 30 3m FX Vol (EUR,USD, GBP/USD, USD/JPY) July 29, 2026 25 25

Source: Goldman Sachs FICC and Equities, Goldman Sachs Global Investment Research

We look back at 11 episodes over the past 20 years when FX volatility rose sharply to determine the factors that could disrupt the current low-vol regime. We define a sharp increase as a period when vol trended higher by at least 3 vols from trough to peak (see Appendix for the full list of episodes and their catalysts).1 We find that, on average, volatility across equities, commodities, and rates rose by notable and similar magnitudes in those periods.2 Exhibit 2 shows that FX vol has fallen since the June FOMC meeting, likely in part due to much smaller increases in equity index and commodity vol, despite higher rates vol.

1 We include the days around “Liberation Day,” even though FX vol increased by just under 3 vols. 2 We scale the shifts in volatility by the standard deviation of daily moves since 2005 to make them comparable across assets.