The Carry trade era is coming to an end

GBP/JPY

Key zone: 216.50 - 217.50

Buy: 218.00 (on a confident break above 217.50); target 219.50-220.50; StopLoss 217.30

Sell: 216.00 (on strong negative fundamentals) ; target 214.50-213.50; StopLoss 216.70

The Japanese yen is no longer a symbol of the zero-rate era. Since June, the Bank of Japan’s policy rate has stood at 1.0%, and the next BOJ meeting will take place on September 17–18. For the FX market, this is no longer just another central bank decision — it is a potential trigger for one of the most popular strategies of recent years.

Japan is no longer handing out money for free. For years, the yen was the ideal funding currency — now that model is beginning to break down.

A reminder:

The mechanics of the carry trade are simple: an investor borrows money in a low-interest-rate currency and allocates the capital to higher-yielding assets. As long as the interest-rate differential gives the investor a meaningful premium over the cost of yen funding, the carry trade works. But the higher the BOJ rate rises, the smaller that premium becomes. This means the market is gradually approaching the point where huge positions built on cheap yen will have to be reassessed.

On July 29, the Bank of England kept its policy rate at 3.75%, but the decision itself was far less calm than the headline suggests. Inside the UK central bank, a struggle is already underway between concerns about inflation and risks to economic growth.

• UK CPI inflation fell to 2.6%, but the BOE expects it to accelerate to around 3.2% in Q4 2026.
• The energy shock is simultaneously pushing prices higher and weighing on real demand.
• If the UK economy starts slowing sharply, the market will quickly stop believing in the positive scenario. Expectations for BOE rate cuts would then increase, and one of sterling’s main advantages would disappear.

The BOJ is moving in the opposite direction: inflation is giving the Bank of Japan room to tighten policy further. In July, headline CPI accelerated from 1.6% to 1.9%, core CPI reached 1.8%, while core-core CPI, excluding fresh food and energy, rose to 1.9%.

The market is already pricing in the possibility of another 25 bp BOJ rate hike — to 1.25%.

If the BOJ continues raising rates while the BOE starts cutting them, sterling’s advantage will shrink from both sides at once — and this process represents the main threat to the carry trade.

On July 31, the US and Japan conducted a joint intervention to support the yen — the first such operation since 1998. Afterward, USD/JPY quickly fell from around 164 to 156. For holders of long GBP/JPY positions, this is a crucial signal.

The carry trade generates relatively steady profits as long as the rate differential remains intact. But an intervention can wipe out accumulated gains in just a few trading sessions.

Carry profits accumulate gradually, while losses from a sharp yen appreciation can materialize instantly. That is why the strategy of “buying GBP/JPY on every dip” no longer looks unconditionally attractive.

Oil can also hit both currencies. Both the UK and Japan depend on energy imports, so expensive oil worsens the trade balance of both countries. The same oil shock can initially weaken the JPY and then become a factor supporting its appreciation.

That is why GBP/JPY can no longer be analyzed solely through oil dynamics. Traders need to monitor Japanese inflation expectations, JGB yields, and BOJ rhetoric.

So, what does this mean?

The carry trade is not dead yet.

As long as GBP/JPY retains sterling’s interest-rate advantage, buyers will be rewarded for holding positions. However, that yield now comes at a much higher price in terms of risk.

Technically, GBP/JPY still maintains a bullish structure. Short-term indicators mostly point to further gains.

But the fundamental support is no longer what it used to be. The 219–220 zone is becoming the main battleground, while 220 is the level where the market votes on the carry trade.

The BOJ has already exited the zero-rate regime. Japanese inflation gives it room for further hikes, and the authorities are prepared to intervene in the FX market. The BOE, by contrast, is moving closer to the point where weak economic growth could force it to ease policy.

The key question now is what happens first — will GBP/JPY break above 220 and prove sterling’s strength, or will a narrowing BOE–BOJ spread trigger a massive unwinding of positions accumulated over years of cheap yen?

So we act wisely and avoid unnecessary risks.

Profits to y’all!