USD/CAD remains below 1.3650 due to dovish sentiment surrounding the Fed

• USD/CAD loses ground as US Dollar faces challenges after weaker-than-expected US employment data released on Friday.
• According to CME's FedWatch Tool, the probability of a Fed rate cut in September has increased to 70.7%, up from 64.1% just a week ago.
• Canada's 10-year government bond yield fell below 3.53%, indicating an accommodative stance by the BoC.

USD/CAD traces back its recent gains, trading around 1.3630 during the Asian session on Monday. This decline is attributed to the lower US Dollar (USD) following weaker-than-expected US employment growth data released on Friday. This has increased the probability of the Federal Reserve’s (Fed) interest rate cuts sooner rather than later.

US Nonfarm Payrolls (NFP) increased by 206,000 in June, following a rise of 218,000 in May. This figure surpassed the market expectation of 190,000. The US Unemployment Rate edged up to 4.1% in June from 4.0% in May. Meanwhile, Average Hourly Earnings decreased to 3.9% year-over-year in June from the previous reading of 4.1%, aligning with market expectations.

According to the CME's FedWatch Tool, rate markets are currently pricing in a 70.7% probability of a rate cut in September, up from 64.1% just a week earlier. The Greenback faced challenges as the Fed Chair Jerome Powell said last week that the central bank is getting back on the disinflationary path, per Reuters.

However, minutes from the Federal Reserve's June monetary policy meeting indicated that Fed officials were adopting a cautious "wait-and-see" approach. Some participants highlighted the Committee's commitment to a data-dependent approach.

In Canada, the Unemployment Rate rose to 6.4% in June, surpassing the expected 6.3% and reaching its highest level since January 2022. This increase highlights concerns from the Bank of Canada (BoC) that high interest rates are putting significant pressure on the job market, prompting calls for potential rate cuts to support economic recovery. Additionally, Canada's 10-year government bond yield dropped below 3.53%, reflecting expectations of a more accommodative stance from the central bank.

The commodity-linked Canadian Dollar (CAD) may see limited gains due to falling crude Oil prices. Canada, a major crude Oil exporter to the United States (US), is observing West Texas Intermediate (WTI) oil trading around $82.40 per barrel at the time of writing. Geopolitical tensions in the Middle East eased with prospects of a ceasefire in Gaza, contributing to the decline in Oil prices.