*C$ rises to 96.30 U.S. cents
*Bond yields creep higher
*Canada inflation rate in June slows to 1.0 pct
By Claire Sibonney
TORONTO, July 23 (Reuters) - The Canadian dollar inched up against its U.S. counterpart on Friday, as positive North American equity futures offset the negative impact of soft domestic inflation data, while market participants eagerly awaited the results of European bank stress tests.
Moderating energy prices helped to slow Canada's annual inflation rate in June from May, suggesting that the Bank of Canada has breathing room to take a gradual approach to future interest rate hikes. [ID:nN23500487]
Initially after the data, the Canadian dollar CAD=D4 fell to a session low of C$1.0440 versus greenback, or 95.79 U.S. cents, but quickly rebounded as a new batch of solid U.S. corporate results pointed to a continuing rally in equity markets.
"The Canadian dollar is probably more sensitive, I think, to the activity numbers rather than the inflation numbers," said Adam Cole, global head of FX strategy at RBC Capital Markets.
The Canadian dollar has moved sharply in recent sessions on employment and growth data.
"Canada did dip initially but it's come back a bit and I think that's just basically on the fact that number one, it was probably a little bit preconditioned that we were going to see slightly weaker CPI," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"Number two, we've seen the stock futures point in the right direction on the positive side and that's generally been good for the Canadian dollar."
At 8:35 a.m. (1235 GMT), the Canadian currency CAD=D4 was at C$1.0384 to the U.S. dollar, or 96.30 U.S. cents, up from Thursday's finish at C$1.0393 to the U.S. dollar, or 96.22 U.S. cents.
Butler noted that a key technical level to watch was the 100-day moving average which is 1.03.
"We tested it four times last week, couldn't ever get a close below it, so I think if we can go down to that C$1.0280 to C$1.03 area that will be really important for the downside," he said
"Anywhere back up toward that C$1.0560 to C$1.0580 area is going to be certainly the topside and before we get there I think we should probably find a little bit of resistance up toward C$1.05."
The Canadian dollar was dragging prior to the inflation data, as positive economic data in Europe boosted buying of euros and sterling against the currency.
News that Britain's economy grew almost twice as fast as expected in the second quarter and German business sentiment leaped by a record margin in July cheered investors ahead of the European bank stress test results due at noon EDT [1600 GMT]. [ID:nLDE66M0RN] [ID:nLDE66L1XU]
A slip in oil prices also weighed on the commodity-linked currency. [O/R]
Canadian bond prices extended their declined after the soft inflation report, tracking U.S. Treasuries lower after the solid U.S. corporate earning results whetted investor appetite for riskier assets. [US/]
The two-year bond CA2YT=RR lost 5 Canadian cents to yield 1.573 percent, while the 10-year bond CA10YT=RR shed 30 Canadian cents to yield 3.249 percent.
(Additional reporting by John McCrank) (Editing by Theodore d'Afflisio)