USD/JPY bounces up and approaches 159.00 with all eyes on the BoJ

• USD/JPY tests weekly highs at 158.87 after bouncing from the 157.45 area.
• In Japan, the focus shifts to the BoJ's decision, with the Yen on the defensive.
• US GDP and PCE Inflation data are expected to support the view of a Fed pause later on Thursday.

The US Dollar is trading higher across the board on Thursday, favoured by the de-escalation of the EU-US tensions. A brighter market sentiment halted the “Sell America” trade, pushing the USD/JPY to test one-week highs, at 158.87 on Thursday, after bouncing from the mid-range of the 157.00s earlier this week.

The Yen remains on the defensive as the Bank of Japan’s  (BoJ) two-day monetary policy meeting kicks off. The bank raised its benchmark interest rate by a quarter-point to  0.75% in December, the highest level in the last 30 years, and is widely expected to stand pat on Friday.

The BoJ meets with the Yen against the ropes

The Yen has been struggling after Japanese Prime Minister Sanae Takaichi called a snap election in early February, which might give her stronger parliamentary support to expand her big-spending, low-tax policy amid growing fears of a fiscal crisis. In this context, an ambiguous stance by BoJ Governor Ueda regarding further monetary tightening is likely to send the Yen on a tailspin.

The US Dollar, by contrast, is drawing some support from Trump’s softer tone towards Europe at the Davos World Economic Forum. The US President ruled out military action to annex Greenland and dropped the threat of additional tariffs on European countries, triggering a risk relief in financial markets.

The focus on Wednesday is on the release of the final numbers of the Q3 US Gross Domestic Product, which is expected to show a healthy economic growth, and the US PCE Price Index, which is seen steady at levels well above the US Federal Reserve’s 2% target. If the market consensus is confirmed, the data might provide additional support for the Greenback. 

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