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By: Editorial Team, StoneX Media
As of July 2026, the global carry trade is regaining momentum as monetary policy divergence becomes more pronounced. Markets are increasingly pricing a more hawkish Federal Reserve while the Bank of Japan is expected to keep interest rates unchanged, reinforcing one of the largest yield differentials among major developed economies. That policy split is helping drive renewed demand for the U.S. dollar while leaving the Japanese yen under sustained pressure. For investors, the persistence of these yield gaps could remain a defining driver of foreign exchange markets through the summer.
Fiona Cincotta, StoneX Senior Market Analyst, closely follows the interaction between central bank policy, currencies and macroeconomic trends. Her analysis focuses on how shifting interest rate expectations influence capital flows, currency valuations and trading opportunities across global markets.
Carry trades are becoming increasingly attractive as the interest rate gap between the United States and Japan continues to widen. Fiona Cincotta notes that "the market has increased expectations surrounding a hawkish Federal Reserve next week" while adding that markets are pricing "around 35% probability of a Fed rate hike next week". Higher U.S. yields increase the potential return from borrowing cheaply in Japanese yen and investing in U.S. dollar assets. As long as policy divergence persists, the carry trade is likely to remain an important source of demand for the U.S. dollar.
The Bank of Japan's cautious policy stance continues to reinforce favourable conditions for carry trades despite growing intervention concerns. Cincotta explains that "the Bank of Japan is expected to leave interest rates unchanged at its meeting next week", adding that this "Fed BOJ divergence is lifting the pair... also fueling the carry trade". Although Japanese officials continue to signal their willingness to intervene in currency markets, widening yield differentials remain a more powerful structural force supporting USD/JPY. Unless monetary policy expectations change materially, investors may continue favouring strategies that exploit these interest rate advantages.
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--- Written by Frédéric Guétin, StoneX TV Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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