2 questions regarding Button and touch event

Can I do this in the emulator? Highlighting of the key and then selecting using the BTN2 ?

Yes... Try:

var KB = [
'QWERTYUIOP[]',
'ASDFGHJKL;\'#',
'\\ZXCVBNM<>/ '];
var KBX = 3;
var KBY = 160;
var KBS = 20; // key spacing
var KBR = 16; // key size
var keyx = 0, keyy = 0;

function drawKey(x,y,lit) {
  var px = KBX+x*KBS,
      py = KBY+y*KBS;
  g.setColor(lit?-1:0).fillRect(px, py, px+KBR, py+KBR);
  g.setColor(lit?0:-1).drawString(KB[y][x],px+2,py)
  g.setColor(-1);
}

function drawKB() {
  g.setFont("6x8",2);
  for (var y=0;y<KB.length;y++)
    for (var x=0;x<KB[0].length;x++)
      drawKey(x,y,0);
}


g.clear();
drawKB();
drawKey(keyx,keyy,1);
function moveKey(x,y) {
  drawKey(keyx,keyy,0); // clear old
  keyx += x;  
  if (keyx>=KB[0].length) keyx=0;
  if (keyx<0) keyx=KB[0].length-1;
  keyy += y;
  if (keyy>=KB.length) keyy=0;
  if (keyy<0) keyy=KB.length-1
  drawKey(keyx,keyy,1); // show new
}

setWatch(_=>moveKey(0,-1),BTN1,{repeat:true});
setWatch(_=>moveKey(0,1),BTN3,{repeat:true});
setWatch(_=>moveKey(-1,0),BTN4,{repeat:true});
setWatch(_=>moveKey(1,0),BTN5,{repeat:true});
setWatch(_=>{
  var key = KB[keyy][keyx];
  console.log(`You pressed "${key}"`);
},BTN2,{repeat:true});