USD/JPY tests highs at 154.78, focus on BoJ

• The US Dollar maintains a buying tone and is testing highs of 154.78.
• The Yen continues to be weighed down by interest rate differentials between the Fed and the BoJ.
• The BoJ's monetary policy statement on Friday could give further impetus to the Yen.

Nothing stops the US dollar. Neither the moderate risk appetite observed on Monday, nor the repeated warnings of intervention by various economic authorities, the Yen remains anchored at levels close to 155.00.

The pair extended its recovery on Monday, following a downward rally last week following news of the Israeli attack on Iran. Tehran downplayed the event, signaling its desire to avoid a direct confrontation with Tel Aviv, which the market has welcomed.

This has failed to give some oxygen to a battered yen, which is struggling in the dynamics of the carry trade. The widening yield differential between the Yen and most major currencies encourages speculators to borrow the Yen and exchange it for higher-yielding assets elsewhere.

Adverse interest rate differentials weigh on the Yen

Last week, a rare joint statement by US, Japanese and South Korean authorities pledged to act against excessive currency volatility. This had an immediate easing effect on the US Dollar, which appears to have fallen on Monday.

The weakness of the Yen helps Japanese exporters sell their products in foreign markets, but makes imports more expensive in domestic markets. This has an inflationary impact on prices and forces the BoJ to accelerate its pace of normalization. The Japanese central bank meets on Friday, following the publication of advance CPI figures from Tokyo. Any indication in this regard in the bank's statement could give a new boost to the Yen.

In the US, focus will be on Thursday's first quarter GDP figures and price index data PCE on Friday. This is the Fed's preferred indicator for assessing inflationary trends and could dictate the direction of the US dollar in the short term.