After more than 20 hours spent on this issue I think I finally figured it out.
The issue was on the settings from my serial monitor YAT. It turns out that the Flow Control had to be Hardware RTS/CTS
I previously had No flow control selected.
This is in line with an old bug report I filed in the YAT Sourceforge repository related to a similar issue with a XIAO board with flow control:
https://sourceforge.net/p/y-a-terminal/bugs/578/
The original report on this Flow Control issue:
https://sourceforge.net/p/y-a-terminal/discussion/serialport/thread/9b9e7abe9f/
I would like to thank @sivar2311 for his help. While you gave me a clear answer I realised that my settings and custom .json file were correct all the time and the problem was due to an external factor.
This issue should be considered as closed and to other users facing the same issue: Enable Hardware Flow Control on your serial terminal!