USD/CAD Price Forecast: Debate over size of Fed’s next rate hike backs further upside

Goldman Sachs anticipates a 25-basis-point increase in the Federal Reserve's interest rates in March, following unexpectedly high October inflation figures that prompted a revision of its outlook. This move follows Deutsche Bank's prediction of an additional quarter-point hike in January, alongside prior forecasts for December and March.

October's data marked the third consecutive month of inflation exceeding market expectations, driven by rising oil prices due to the Iran conflict, Donald Trump's trade policies, strong consumer demand, and significant investment in artificial intelligence. The surge in living costs has fueled discontent among voters, contributing to substantial losses for Trump's Republican Party in the recent midterm elections.

Goldman Sachs believes a third rate increase is more probable in March than in January, as it anticipates inflation to stabilize by year-end before new inflationary pressures, primarily from elevated costs, resurface. While the energy shock may diminish by March, Goldman's chief US economist, David Mericle, anticipates the Federal Open Market Committee (FOMC) members to signal a third rate hike by December's meeting, based on recent inflation readings.

Goldman now expects interest rate reductions to commence in December 2027, followed by further cuts in March, June, and September 2028.