The Market Expects The Fed To Be Dovish & USD/CAD Is Still Blocked At 1.3650

USD/CAD gave up recent gains and traded around 1.3630 during Asian trading on Monday. The decline in USD/CAD was due to the weaker-than-expected US non-farm payrolls data released last Friday, which led to a lower US dollar. This increased the prospect of an early rate cut by the Federal Reserve (Fed).

US non-farm payrolls (NFP) increased by 206,000 in June, compared with 218,000 in May. This figure was 190,000 higher than expected. The US unemployment rate rose to 4.1% in June from 4.0% in May. Meanwhile, the annual average hourly wage rate in June fell to 3.9% from 4.1% in the previous month, in line with market expectations.

The Chicago Mercantile Exchange Fed Watch tool shows that the interest rate market is currently pricing in a 70.7% probability of a rate cut in September, up from 64.1% a week ago. According to Reuters, Fed Chairman Powell said last week that the central bank is getting back on track to control inflation, which poses challenges to the US dollar.

However, the minutes of the Fed’s June monetary policy meeting showed that Fed officials adopted a cautious “wait-and-see” approach. Some participants stressed that the committee is committed to an approach where interest rate policy will be dependent on economic data.

In Canada, the unemployment rate rose to 6.4% in June, exceeding expectations of 6.3% and reaching its highest level since January 2022. The increase highlights the Bank of Canada’s (BoC) concerns that high interest rates have put great pressure on the job market, triggering calls for a possible rate cut to support the economic recovery. In addition, the Canadian 10-year bond yield fell below 3.53%, reflecting market expectations that the BoC will adopt a more accommodative policy stance.

The commodity-linked Canadian dollar (CAD) may have limited gains due to the decline in crude oil prices. Canada is a major crude oil exporter to the United States. At press time, the price of West Texas Intermediate (WTI) crude oil was at $82.40. Oil prices fell as geopolitical tensions in the Middle East eased with the prospect of a ceasefire in Gaza.

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