USD/CAD hangs near multi-month lows, around mid-1.2300s ahead of Canadian CPI

• USD/CAD lacked any firm directional bias and remained confined in a range on Wednesday.
• Rallying US bond yields revived the USD demand and extended some support to the major.
• A modest pullback in crude oil prices undermined the loonie ahead of the Canadian CPI report.

The USD/CAD pair now seems to have entered a bearish consolidation phase and was seen oscillating in a range, around mid-1.2300s through the early European session.

The pair struggled to capitalize on the previous day's late rebound from the vicinity of the 1.2300 mark, or over three-month lows and witnessed a subdued/range-bound price action on Wednesday. However, a combination of factors helped limit the downside for the USD/CAD pair, at least for the time being.

Crude oil prices edged lower after the Chinese government stepped up efforts to tame record high coal prices and ease a power shortage. The move triggered a selloff in Chinese coal and other commodities, which, in turn, prompted some profit-taking and pulled crude oil prices away from multi-year tops.

Retreating oil prices undermined the commodity-linked loonie, which, along with a goodish pickup in the US dollar demand, extended some support to the USD/CAD pair. The greenback drew some support from an extension of the recent strong move up in the US Treasury bond yields and a softer risk tone.

The US bond yields have been rally amid growing acceptance that the Fed will soon begin rolling back its massive pandemic-era stimulus. The markets also seem to have started pricing in the possibility of a potential interest rate hike in 2022 amid fears about a faster-than-expected rise in inflation.

The prospects for an early policy tightening by the Fed pushed the yield on the benchmark 10-year US government bond to the highest level since May, around 1.672% on Wednesday. This was seen as a key factor that helped revive the USD demand, though the uptick lacked any bullish conviction.

Wednesday's key highlight will be the release of Canadian consumer inflation figures, due later during the early North American session. Apart from this, oil price dynamics will influence the Canadian dollar and provide some impetus to the USD/CAD pair amid absent relevant economic data from the US.

Technical levels to watch