MUFG Research discusses the Fed rates outlook.

"The US dollar has continued to trade at stronger levels overnight after breaking higher least week triggered by the hawkish repricing of Fed rate hike expectations. The dollar index briefly rose back above the 101.00-level on Friday for the first since May of last year. At the same time, the 2-year US Treasury yield has risen back above 4.20% for the first time since February of last year prior to President Tump’s “Liberation Day” tariffs announcement in April 2025," MUFG notes.

"The recent run of positive US economic data surprises and hawkish Fed policy communication has encouraged market participants to price in almost a 50:50 probability of a rate hike as soon next month. With the US mid-term election taking place later this year in November, it could be easier for the Fed to hike rates sooner rather than later. In addition, if they hold off from hiking rates soon then slowing inflation from lower energy prices and the fading impact of tariff hikes should dampen the need for hikes later this year as well," MUFG adds.