GBP/JPY rose for a second day on Tuesday, trading near 211.60 and close to one-week highs. The move came as higher oil prices linked to the US-Iran conflict weakened the Japanese Yen against major currencies.
Markets remained cautious ahead of a deadline set for 8:00 p.m. Eastern Time (00:00 GMT on Wednesday) for Iran to “make a deal or open up the Strait of Hormuz”. US President Donald Trump said the US could target Iran’s energy and civilian infrastructure if no agreement is reached.
Oil Shock Weighs On The Yen
Japan, a major net energy importer, faces higher import costs from rising oil prices, which can widen trade deficits and pressure the currency. Finance Minister Satsuki Katayama said officials are monitoring scenarios for oil stockpiles in light of the Middle East situation.
Rate expectations also supported GBP/JPY, with policy differences between the Bank of England and the Bank of Japan. Markets are pricing in up to two UK rate hikes by year-end, while Japan’s policy normalisation may be restrained by weaker growth from energy costs.
UK data showed the S&P Global Services PMI fell to 50.5 in March from 53.9, below the flash 51.2 and the lowest since April 2025. The Composite PMI dropped to 50.3 from 53.7, while Japan’s February earnings and current account data are due on Wednesday.
Given the ongoing US-Iran conflict, we see continued upward pressure on the GBP/JPY pair as oil prices hold above $115 a barrel. This geopolitical tension disproportionately weakens the Japanese Yen due to Japan’s heavy reliance on foreign energy. As a result, we should position for further yen weakness in the coming weeks.
Carry Trade Still Dominates
The primary driver remains the stark interest rate differential between the Bank of England and the Bank of Japan, which currently sits over 5 percentage points. This gap makes holding the Pound more attractive than the Yen, fueling a profitable carry trade. We saw this theme play out through much of 2025, and the current energy crisis is only accelerating it.
Japan’s vulnerability is clear, as recent government data shows it still imports around 96% of its primary energy supply. Last month’s trade data already showed a widening deficit directly linked to higher energy import costs. This fundamental economic strain is likely to persist as long as tensions in the Strait of Hormuz remain unresolved.
While the Pound is the stronger leg of this pair, we must not ignore its own weaknesses. The recent slip in the UK Services PMI to 50.5, its lowest point since the brief recession scare in April 2025, suggests the UK economy is not immune to global pressures. However, with UK core inflation remaining stubbornly above 3.5%, the Bank of England is forced to maintain high rates.
The biggest immediate risk to a long GBP/JPY position is intervention from Japanese authorities. With USD/JPY approaching the 160.00 level, a line that has historically triggered direct market action, traders should be cautious about becoming overly leveraged. We saw how quickly officials acted back in 2022 and 2024 to defend the currency, and their resolve should not be underestimated.
Considering the risk of a sharp reversal from either a peace deal or intervention, buying call options on GBP/JPY could be a prudent strategy. This allows us to capture further upside while defining our maximum risk to the premium paid. Using options with a two-to-three-week expiry would cover the period immediately following the 8:00 p.m. deadline for Iran.
