USD/CAD retreats to 1.2885 inside the 20-pip daily trading range heading into Wednesday’s European session. In doing so, the Loonie pair justifies the options market signals that tease bears of late.

That said, the one-month risk reversal (RR) of the USD/CAD, a spread between the call options and the put options, drop for the second consecutive day to -0.020 by the end of Tuesday’s North American session. With this, the weekly RR prints the biggest fall in four weeks.

It should be noted, however, that the market’s anxiety ahead of the US Consumer Price Index (CPI) data for July appear to challenge the pair’s latest moves. The inflation numbers become even more important of late as the recently firmer US jobs report underpinned the hawkish Fed bets.

On Tuesday, US Nonfarm Productivity improved to -4.6% during the second quarter (Q2), -4.7% expected and -7.4% prior, whereas the Unit Labor Cost increased to 10.8% from 12.7% prior and 9.5% market consensus during the said period. Before that, the US Nonfarm Payrolls (NFP) and Unemployment Rate also flashed welcome signs for July.

Additionally, St. Louis Fed President James Bullard said on Tuesday that he wants rates at 4% by the end of the year. This joins recently firmer interest rate futures suggesting nearly 70% odds favoring the 75 basis points (bps) of a Fed rate hike in September.

It’s worth noting that the US CPI is expected to ease to 8.7% from 9.1% on YoY while the CPI ex Food & Energy could rise from 5.9% to 6.1% during the stated month, per the latest market consensus.

Also read: USD/CAD struggles to regain 1.2900 on softer oil, firmer USD ahead of US inflation

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