The Canadian dollar strengthened against its US counterpart on Monday as a preliminary peace agreement between the United States and Iran boosted global investor sentiment. However, gains remained limited ahead of this week's Federal Reserve interest rate decision.

The Canadian dollar, commonly known as the loonie, rose 0.1% to C$1.3980 per US dollar, or 71.53 US cents, after trading within a range of C$1.3951 to C$1.3992. The currency had touched a seven-month low of C$1.4023 last Thursday.

Global equity and bond markets rallied while oil prices declined, as investors bet that the agreement could ease inflationary pressures worldwide and reduce the need for further interest rate increases.

Analysts at Monex Europe said in a research note:

Improving risk appetite is likely to be the dominant short-term driver following the signing of the agreement. However, with markets still pricing in the possibility of a hawkish Federal Reserve stance on Wednesday, upside for the Canadian dollar may remain limited.

Markets are also awaiting comments from Kevin Warsh, who is expected to outline his economic outlook and views on interest rates following the conclusion of the Federal Reserve's June 16-17 policy meeting.

Lower oil prices and bearish positioning cap gains

Data released Friday by the Commodity Futures Trading Commission showed that speculators increased bearish bets against the Canadian dollar to their highest level since December.

Net non-commercial short positions in the currency rose to 119,999 contracts as of June 9, up from 94,111 contracts a week earlier.

Meanwhile, crude oil pricesone of Canada's most important exportsfell 5.5% to $80.23 per barrel amid expectations that the Strait of Hormuz will soon reopen.

On the domestic front, April data showed Canadian manufacturing sales rose 4.2% from March, while wholesale trade increased 0.6%.

Canadian housing starts declined 6% in May compared with the previous month, though the drop was less severe than economists had expected.

In the bond market, Canadian government bond yields were mixed across a steeper yield curve.

The yield on Canada's two-year government bond fell 2.6 basis points to 2.734%, after earlier touching 2.702%, its lowest level since March 18.