Japanese Yen drifts lower as soft Tokyo CPI dents BoJ rate hike bets; USD/JPY eyes 160.00

• USD/JPY attracts fresh buyers on Tuesday following the release of soft Tokyo CPI print.
• The data tempers BoJ rate hike bets and undermines the JPY amid economic concerns.
• Hawkish Fed expectations lift the USD to a fresh YTD peak and further support the pair.

The USD/JPY pair builds on the previous day's late rebound from the 159.35-159.30 area and gains some positive traction during the Asian session on Tuesday. Spot prices stick to modest gains following the release of softer Tokyo consumer inflation figures, though the uptick stalls ahead of the 160.00 psychological mark.

A government report released earlier today showed that the headline Consumer Price Index (CPI) in Tokyo – Japan's capital city – slowed from the 1.5% in the previous month and rose 1.4% in March, marking the lowest print since March 2022. Adding to this, the core gauge, which excludes volatile fresh food prices, climbed 1.7% during the reported month, compared to 1.8% in February. Moreover, the core CPI that excludes both fresh food and energy costs grew 2.3% in March, down from the 2.5% in the prior month.

The data temper bets for an immediate rate hike by the Bank of Japan (BoJ) amid economic concerns stemming from the Iran war, and undermines the Japanese Yen (JPY). This, along with a bullish US Dollar (USD), acts as a tailwind for the USD/JPY pair. Traders have fully priced out the possibility of any further rate cuts by the US Federal Reserve (Fed) and rapidly increasing bets for a hike by the end of this year amid concerns about the war-driven spike in inflation, pushing the USD to a fresh year-to-date high.

Meanwhile, Japan's Vice Finance Minister for International Affairs, Atsushi Mimura, issued the strongest signal yet on Monday and said that authorities are ready to take decisive action if speculative moves in the currency markets continue. Moreover, BoJ Governor Kazuo Ueda said that the central bank will closely watch FX moves, fueling speculations that authorities would step in to stem weakness in the domestic currency. This holds back the JPY bears from placing fresh bets and caps the upside for the USD/JPY pair.