USD/CAD holds below 1.3900 on dovish Fed bets, eyes on US PMI data

• USD/CAD trades with mild gains 1.3880 in Monday’s early European session. 
• The uptick of the pair is bolstered by the risk-off sentiment. 
• Traders expect one more 25 bps rate cut by the BoC in its September meeting. 

The USD/CAD pair posts modest gains near 1.3880 during the early European trading hours on Monday. The fall of crude oil prices exerts some selling pressure on the commodity-linked Canadian Dollar (CAD). However, the safety flows might provide some support to the Greenback and cap the pair’s upside. The US ISM Services Purchasing Managers Index (PMI) on Monday will be the highlight. 

The risk-off sentiment amid escalating geopolitical tensions in the Middle East might boost the safe-haven currency, lifting the Greenback against the Loonie. US Secretary of State Tony Blinken told his counterparts from the G7 countries on Sunday that an attack by Iran and Hezbollah against Israel could start as early as Monday, three sources briefed on the call told Axios.

However, the weaker US Employment data on Friday could spur the Federal Reserve (Fed) rate cut expectation this year, which might weigh on the Greenback. The Labor Department revealed on Friday that the US Nonfarm Payrolls (NFP) increased by 114K in July, down from the revised lower figure of 179K in June and below the estimate of 185K. Meanwhile, US Unemployment Rate ticked higher to 4.3% in July from 4.1% in June, the highest level since November 2021. 

On the Loonie front, the speculation that the Bank of Canada (BoC) could cut interest rates again this year might undermine the CAD. The markets expect one more 25 bps rate cut this year, with nearly 60% odds that the BoC will cut rates again in its September meeting. Additionally, the lower crude oil prices are likely to exert some selling pressure in the near term as Canada is the leading exporter of Oil to the United States (US).