* C$ edged up slightly after GDP data, then pared gains
* Currency earlier touched 3-week high
* GDP grows 0.5 percent in January as expected
* Bonds higher across curve, tracking US Treasuries (Updates with data, comments)
By Ka Yan Ng
TORONTO, March 31 (Reuters) - The Canadian dollar held steady against the U.S. currency on Thursday, supported by strong oil prices and a report on Canadian economic growth that was in line with forecasts.
The economy grew 0.5 percent in the January from December, as expected, a solid start to the year and potentially enough for an upgraded economic outlook by the Bank of Canada in its Monetary Policy Report (MPR) in April. CAGDPM=ECI [ID:nN31223177]
But the report was not seen as strong enough to spur the central bank to raise interest rates next month.
"We think they are going to be more optimistic in April. We do expect them to use that MPR ... to lay the foundations for the tightening campaign. But in the backdrop we've also had four straight CPI reports that have below expectations," said David Watt, senior fixed income and currency strategist, at RBC Capital Markets.
"The Bank of Canada's got a difficult situation. But we think they are more likely to move in May."
Following the data, traders maintained bets that there is almost no probability that the central bank would raise rates in April, according to a Reuters calculation of yields on overnight index swaps. Odds of a May hike were also seen as low. BOCWATCH
However, the market slightly increased the probability of a move at the July, September, October and December policy setting dates. The odds of a September hike are almost fully priced in.
The Canadian dollar tilted a touch higher in response to the GDP data, edging to C$0.9694 to the U.S. dollar, or $1.0316, up from about C$0.9701 to the U.S. dollar, or $1.0308, just ahead of the report.
By 9:15 a.m. (1315 GMT), the currency had pared gains and was sitting little changed from Wednesday's close at C$0.9713 to the U.S. dollar, or $1.0296, and well shy of the three-week high of C$0.9683, or $1.0327, hit earlier in the session.
"The U.S. dollar itself is making a bit of a comeback too so it seems like CAD is just getting caught up," said Watt.
But firming crude oil prices helped support the Canadian dollar, with Middle East supply worries keeping oil above $100 a barrel. The firm crude oil price has been a boon for the commodity-linked Canadian dollar with oil a major export for the country. [O/R]
Canadian bond prices were mostly higher across the curve, mirroring U.S. Treasury movements, and taking little notice of the domestic GDP data. Instead, investors were cautious ahead of the influential U.S. non-farm payroll data for March, to be released on Friday. [US/]
The two-year bond CA2YT=RR was up 1 Canadian cent to yield 1.770 percent, while the 10-year bond CA10YT=RR added 03 Canadian cents to yield 3.284 percent. (Editing by Jeffrey Hodgson)