USD/CAD saw some gains near 1.3660 during early European trading on Monday. Canadian employment data showed a loss of 24,800 jobs in January, but the unemployment rate surprisingly dropped to a 16-month low of 6.5%.
Federal Reserve Vice Chair Philip Jefferson stated that interest rates are currently neutral. Mary Daly from San Francisco hinted at possible rate cuts. Market watchers are eager for more information from upcoming Fed speeches and the US employment report due on Wednesday.
The delayed US employment report is expected to show 70,000 new jobs for January, with the unemployment rate holding steady at 4.4%. The job losses in Canada were mainly in part-time positions, and the lower unemployment rate reduced the chances of aggressive easing by the Bank of Canada, which supported the Canadian Dollar (CAD).
The CAD is affected by the Bank of Canada’s interest rates, the price of oil, and overall economic health. Higher oil prices and better economic data usually strengthen the CAD. Bank of Canada’s interest rate decisions also play a crucial role in controlling inflation and affecting credit conditions. Key economic indicators, like GDP and employment data, influence the CAD’s path.
Looking back to early 2025, the market faced mixed signals for the USD/CAD pair. The Canadian economy had odd job losses paired with a declining unemployment rate, and Federal Reserve officials disagreed on interest rate policies. This created uncertainty around the 1.3660 level.
In 2025, some dovish remarks from Fed members didn’t materialize right away, as persistent services inflation kept the Fed from changing rates until a modest quarter-point cut in late September. US core inflation remained stubborn at about 3.1%, well above the Fed’s target. This environment indicates that expectations for major US rate cuts soon may be too optimistic, supporting the US dollar.
On the Canadian front, the Bank of Canada began easing in July 2025 but has been cautious due to housing market inflation concerns. Additionally, WTI crude oil prices struggled to stay above $75 per barrel due to slowing global demand forecasts for 2026. The combination of weaker oil prices and a cautious Bank of Canada limits the potential for the CAD to rise, keeping USD/CAD around 1.3800.
With differences in central bank strategies and ongoing uncertainty in energy markets, traders should consider strategies that can profit from significant price movements in either direction. Options like straddles or strangles on USD/CAD could be beneficial, as they profit from a breakout regardless of direction. Implied volatility has been rising ahead of next month’s central bank meetings, highlighting market tension.
The upcoming US non-farm payrolls report will be crucial. A strong report showing over 200,000 new jobs could diminish the likelihood of near-term Fed rate cuts. We recall that a surprisingly strong jobs report in summer 2024 led to a rapid 150-pip jump in USD/CAD in a single day. A similar scenario now could push the pair toward the 1.4000 resistance level.
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