USD/CAD hovers around 1.2700 as oil, yields rebound ahead of US inflation

• USD/CAD struggles to extend the previous day’s recovery moves, picks up bids of late.
• Mixed sentiment challenges traders, Omicron, Fed-linked chatters and China are in focus.
• US CPI will be crucial ahead of next week’s FOMC.
• BOC expected to keep inflation forecasts intact despite policymakers' fear of firmer price pressure.

USD/CAD pares intraday losses amid a sluggish European morning on Friday. Alike other major currency pairs, the Loonie also awaits the key US inflation figures for near-term direction. Also challenging the pair traders are the mixed signals concerning the Bank of Canada (BOC) and the Fed.

Although Reuters quotes a source to confirm no policy shift in the BOC strategy, as the central bank and finance ministry review the inflation target, the BOC Deputy Governor Toni Gravelle said on Thursday that concerns about upside inflation risks are heightened much more than usual.

On the other hand, the US Initial Jobless Claims dropped to the lowest levels since 1969, 184K versus 215K expected and 227K forecast, and raised odds of the faster tapering by the US Federal Reserve (Fed). Among the Fed hawks expecting more rate hikes in 2022 and 2023 are the leading banks that include Goldman Sachs, JP Morgan and Morgan Stanley. Though, a pullback in the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data seems to probe the Fed hawks.

Elsewhere, hopes of overcoming the South African covid variant Omicron with the existing vaccine boosters battle the latest lockdowns to weigh on the market’s mood. Further, looming defaults of China’s Evergrande and Kaisa join the Sino-American tension to add to the market’s risk-off mood.

It’s worth observing that WTI retreats towards $70.50, up 0.23% intraday at the latest, after declining the most in a week the previous day. The prices of Canada’s main export remain pressured by the downbeat mood and risk emanating from China, one of the world’s largest oil users.

Against this backdrop, the US Treasury yields and the Wall Street benchmarks posted losses the previous day, portraying the risk-off mood, while the latest corrective pullback in both the risk barometers remains less convincing to the traders.

Moving on, the US Consumer Price Index (CPI) for November and the preliminary Michigan Consumer Sentiment Index for December will be crucial to determine near-term USD/CAD moves. Also on the calendar is Canadian Capacity Utilization for Q3.

Read: US Consumer Price Index November Preview: Inflation is the new cause celebre

Technical analysis

Wednesday’s Dragonfly Doji directs USD/CAD buyers towards the yearly peak surrounding 1.2950.