USD/CAD experienced moderate gains near 1.3660 during Monday’s early European trading session. Mixed Canadian employment data showed a loss of 24,800 jobs in January, yet the unemployment rate fell to a 16-month low of 6.5%.
Federal Reserve Vice Chair Philip Jefferson indicated that current interest rates are at a neutral level, while Mary Daly from San Francisco suggested potential rate cuts. Market participants are awaiting further guidance from upcoming Fed officials’ speeches and the US employment report expected on Wednesday.
Forecasted US Employment Report
The delayed US employment report is forecast to show 70,000 new jobs for January, with the unemployment rate stable at 4.4%. The Canadian job losses, largely in part-time work, and a lower unemployment rate diminished the risk of aggressive Bank of Canada easing, supporting the CAD.
The Canadian Dollar is influenced by Bank of Canada’s interest rates, the price of oil as a major export, and the health of the economy. Higher oil prices and strong economic data typically strengthen the CAD. Bank of Canada decisions on interest rates can also affect the Canadian Dollar’s value by managing inflation and influencing credit conditions. Macroeconomic indicators such as GDP and employment data further sway the CAD’s trajectory.
Looking back at early 2025, we saw the market wrestling with mixed signals for the USD/CAD pair. The Canadian economy showed a strange combination of job losses and a falling unemployment rate, while Federal Reserve officials were not aligned on interest rate policy. This created a period of uncertainty around the 1.3660 level.
The dovish talk from some Fed members in 2025 did not fully materialize, as persistent services inflation kept the Fed on hold until a single quarter-point cut in late September 2025. We have seen US core inflation hover stubbornly around 3.1% over the last quarter, which is still well above the Fed’s target. This backdrop suggests that expectations for aggressive US rate cuts in the coming months may again be premature, supporting the US dollar.
Canadian Dollar Outlook
On the Canadian side, the Bank of Canada began its easing cycle in July 2025 but has proceeded cautiously, citing concerns over housing market inflation. Compounding this, WTI crude oil prices have struggled to hold above $75 a barrel amid slowing global demand forecasts for 2026. A weaker oil price and a slow-moving Bank of Canada limit the upside for the Canadian dollar, keeping the USD/CAD pair elevated near its current 1.3800.
Given the divergence between central bank expectations and the uncertainty surrounding energy markets, traders should consider strategies that benefit from a significant price move in either direction. Purchasing options like straddles or strangles on USD/CAD could be effective, as they profit from a breakout rather than a specific direction. Implied volatility has been climbing ahead of next month’s central bank meetings, reflecting this market tension.
The upcoming US non-farm payrolls report will be critical, as another strong print above the 200,000 mark would further diminish the case for near-term Fed rate cuts. Historically, we saw how a surprisingly strong jobs report in the summer of 2024 caused a rapid 150-pip rally in USD/CAD within a single day. A similar event now could easily push the pair toward the 1.4000 resistance level.
