Canadian Dollar softens as Gulf peace hopes weigh on Oil prices

USD/CAD trades in a narrow range on Monday, with the Canadian Dollar (CAD) struggling to capitalize on a softer US Dollar (USD) as a mild pullback in Crude Oil prices weighs on the commodity-linked Loonie. At the time of writing, the pair trades around 1.3950, holding near two-month highs.

The US Dollar and Oil prices both moved lower after Iran's Fars News Agency reported that Iran had ended its military operations against Israel. The development came after tensions escalated over the weekend, with Iran and Israel exchanging strikes for the first time since the ceasefire announced in April.

West Texas Intermediate (WTI) Crude Oil trades around $90 per barrel after touching an intraday high of $93.50 earlier in the day.

The headlines helped keep hopes alive that a broader peace agreement in the Gulf region can still be reached. US President Donald Trump also sought to reassure markets, saying that peace talks between the United States and Iran remain ongoing. However, Trump warned that the US naval blockade of Iranian ports would remain in place until a final agreement is reached.

Beyond geopolitics, traders are turning their attention to upcoming central bank meetings. The Bank of Canada (BoC) is set to announce its policy decision on Wednesday and is widely expected to leave interest rates unchanged at 2.25% for a fifth consecutive meeting.

While inflation accelerated in April, it came in below market expectations, suggesting price pressure remains broadly contained. Meanwhile, the labor market staged a sharp turnaround in May, with employment growth beating forecasts and the unemployment rate declining.

Together, the data support the case for the BoC to remain on hold as policymakers assess the impact of slowing economic growth after Canada entered a technical recession following two consecutive quarters of contraction.

In the United States, traders are awaiting inflation data due later this week ahead of next week's Federal Reserve (Fed) policy decision. Inflation has drifted further away from the Fed's 2% target since the US-Iran war triggered a sharp rise in Oil prices, while the labor market has shown signs of stabilization following last week's stronger-than-expected Nonfarm Payrolls report.

Markets are fully pricing in a pause at next week's meeting, but expectations for another rate hike later this year have increased as investors reassess the inflation outlook.