USD/CAD inches back closer to mid-1.2500s amid broad-based USD strength

• Sustained USD buying assisted USD/CAD to gain some positive traction on Wednesday.
• A modest uptick in oil prices underpinned the loonie and capped the upside for the pair.
• Investors look forward to the US consumer inflation figures for a fresh trading impetus.

The USD/CAD pair traded with a mild positive bias heading into the European session and was last seen hovering near daily tops, around the 1.2535-40 region.

The US dollar built on its post-NFP strong move up amid expectations that the Fed will begin tapering the massive pandemic-era stimulus sooner rather than later. This, in turn, was seen as a key factor that assisted the USD/CAD pair to catch some bids on Wednesday and reverse a part of the previous day's rejection slide from the very important 200-day SMA.

Signs of substantial further progress in the labour market recovery forced investors to bring forward the likely timing for policy tightening by the Fed. The Fed officials have also started to guide the market towards early tapering and higher interest rates as soon as 2022, which was evident from the ongoing strong move up in the US Treasury bond yields.

In fact, the yield on the benchmark 10-year US government bond jumped to the highest level since July 14, closer to the 1.37% threshold. Apart from this, COVID-19 jitters extended some additional support to the safe-haven greenback. That said, a modest uptick in crude oil prices underpinned the commodity-linked loonie and capped gains for the USD/CAD pair.

Meanwhile, uncertainty about how the COVID-19 situation in China will evolve and what this means for oil demand might act as a headwind for the black gold. China has imposed travel curbs that will reduce fuel demand in the world's second-largest oil consumer. This, to a larger extent, offset the overnight bullish report from the American Petroleum Institute.

Moving ahead, the focus now shifts to the release of the latest US consumer inflation figures later during the early North American session. The data will influence market expectations about the next policy move by the Fed and drive the USD. Apart from this, oil price dynamics will also be looked upon for some meaningful trading opportunities around the USD/CAD pair.

Technical levels to watch