Experts agree: Fed will follow monetary tightening path even beyond September meeting

The US Dollar (USD) continued its upward trend on Tuesday, driven by strong US Treasury Yields and expectations that the Federal Reserve (Fed) will maintain its monetary tightening path beyond the upcoming September meeting. The US Dollar Index (DXY), which measures the Greenback's value against six major currencies, rose 0.16% to nearly 99.62. Meanwhile, 10-year US Treasury Yields hit a record high of 5.04%, the highest level in the past 19 years.

The CME FedWatch tool indicates a 92.5% probability that the Fed will hike interest rates by 25 basis points (bps) to 3.75%-4.00% on Wednesday, with a 78.65% likelihood of at least two additional rate hikes in 2023. Elevated inflationary pressures, as evidenced by the US Producer Price Index (PPI) and Consumer Price Index (CPI) reports, have prompted financial market experts to reassess Fed interest rate expectations for the near and medium term, anticipating more hikes this year and in 2027.

While strategists at BNY maintain that the path to higher policy rates will face potential obstacles, analysts at MUFG and Danske Bank view the current repricing of US rates as more hawkish and have adjusted their terminal rate expectations accordingly.