• USD/JPY attracts some follow-through sellers as hopes for Iran diplomacy weigh on the US Dollar.
• The uncertainty over the Fed’s future interest rate moves dragged the USD to a fresh low since March.
• Economic concerns stemming from the instability in the Strait of Hormuz might cap the JPY upside.

The USD/JPY pair is seen extending the previous day's modest pullback from the 159.85 region and drifting lower during the Asian session on Tuesday. Spot prices drop to the 159.00 mark in the last hour, though the downside potential seems limited amid mixed fundamental cues.

Despite failed US-Iran peace talks over the weekend, investors seem hopeful that the door for Iran diplomacy remains open and that negotiations will continue. In fact, US Vice President JD Vance suggested that meaningful progress has been made even as talks have yet to deliver a breakthrough. The optimism, in turn, dents the US Dollar's (USD) reserve currency status and turns out to be a key factor exerting pressure on the USD/JPY pair.

Adding to this, the uncertainty over inflationary pressures and future interest rate moves by the US Federal Reserve (Fed) has dragged the USD to a fresh low since early March. Data released on Friday showed that inflation in the US surged by the most in nearly four years. This led investors to shift focus to potential rate hikes this year. However, traders are yet to completely abandon rate cut bets amid signs of a de-escalation in geopolitical tensions.

Meanwhile, the Japanese Yen (JPY) might struggle to attract any meaningful buyers amid economic concerns stemming from external energy shocks due to the instability in the Strait of Hormuz. US President Donald Trump said that the U.S. Navy blockade of the strategic waterway has officially started and vowed to destroy Iranian warships that get near. Iran responded with threats on all ports in the Persian Gulf and the Gulf of Oman.

Given that Japan depends mostly on oil imports from the Middle East, the uncertainty continues to fuel worries that the economy will come under substantial strain in the foreseeable future. This might hold back traders from placing aggressive bullish bets around the JPY and help limit deeper losses for the USD/JPY pair. That said, speculations that Japanese authorities would step in to stem any further JPY weakness might cap the currency pair.