• USD/JPY scales higher for the third successive day and climbs to a three-week high.
• The BoJ’s dovish outlook and unscheduled bond-buying operation weigh on the JPY.
• Bets for one more Fed rate hike boost the USD and remain supportive of the move.

The USD/JPY pair builds on last week's solid bounce from the 138.00 neighbourhood and climbs to over a three-week high on Tuesday, summing to a rally of around 475 pips over the past three trading days. Spot prices stick to the modest intraday gains through the early European session and currently trade around the 142.70 region, up nearly 0.30% for the day.

Despite the Bank of Japan's (BoJ) steps last week to tweak its Yield Curve Control (YCC) policy, the dovish outlook continues to undermine the Japanese Yen (JPY). In fact, BoJ Governor Kazuo Ueda reiterated the need to maintain monetary support and said that the central bank won't hesitate to ease policy further. Ueda added that more time was needed to sustainably achieve the 2% inflation target. Furthermore, the Japanese central bank announced an unscheduled debt-buying operation on Monday to help contain rising local government bond yields. This, along with the prevalent risk-on environment, is seen weighing on the safe-haven JPY and acting as a tailwind for the USD/JPY pair.

Investors continue to cheer the latest optimism over more stimulus measures from China, which, to a larger extent, overshadows the incoming weaker data and remains supportive of the underlying bullish sentiment across the global equity markets. Apart from this, some follow-through US Dollar (USD) buying provides an additional lift to the USD/JPY pair. In fact, the USD Index, which tracks the Greenback against a basket of currencies, climbs to its highest level since July 10 in the wake of expectations for further policy tightening by the Federal Reserve (Fed). The bets were lifted by the upbeat US GDP report released last week, which pointed to an extremely resilient economy.

Moreover, Fed Chair Jerome Powell had said that the economy still needs to slow and the labour market to weaken for inflation to credibly return to the 2% target. This, in turn, is seen pushing the US Treasury bond yields higher and lending support to the Greenback. Market participants now look to the US economic docket, featuring the release of the ISM Manufacturing PMI and JOLTS Job Openings data. This might influence the USD price dynamics, which, along with the broader risk sentiment, should provide some impetus to the USD./JPY pair. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the upside.