The application of poly(2,6-dimethyl-1,4-phenylene ether) (PPE) as a matrix material for continuous carbon fibre reinforced composites has been studied. Owing to the intractable nature of PPE, melt impregnation is not feasible and therefore a solution impregnation route was explored using epoxy resin as a reactive solvent. The introduction of epoxy resin results in enhanced flow and reduced processing temperatures, enabling the processing of PPE and the preparation of high quality composites. Upon curing the homogeneous epoxy/PPE solutions, phase separation is initiated and the epoxy resin is converted into a dispersed phase. In composites, the epoxy resin preferentially accumulates at the polar fibre surfaces present, resulting in an epoxy layer around the fibre and consequently a high level of interfacial adhesion. For high fibre volume fractions (> 50%), a morphology of epoxy-coated fibres in a pure PPE matrix is obtained. Owing to this unique morphology, the resulting thermoplastic composite materials reveal outstanding mechanical properties with a pronounced synergy in mode-II interlaminar toughness and impact performance.