USD/CAD slips as US-China tensions escalate, Powell in focus

• The Canadian Dollar gains ground as the Greenback softens on escalating US-China frictions
• Trade tensions deepen as China rolls out new port fees on US-linked vessels.
• Traders await Fed Chair Jerome Powell's remarks for clues on the near-term monetary policy outlook.

The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Tuesday, with the USD/CAD easing from its intraday peak of 1.4079 to hover around 1.4037 at the time of writing. The move reflects mild USD weakness, as investors remain wary amid renewed escalation in US-China trade frictions and a cautious mood ahead of a key speech by Federal Reserve (Fed) Chair Jerome Powell.

Escalating trade frictions between the United States (US) and China have dominated market sentiment this week. The tensions reignited late Friday after US President Donald Trump shocked investors by announcing plans to impose 100% tariffs on all Chinese imports starting November 1, following Beijing's new export controls on rare earth elements.

While hopes of renewed dialogue over the weekend briefly soothed nerves, fresh headlines reignited caution. China introduced new port fees on US-linked ships, mirroring Washington's earlier move to levy similar charges on Chinese vessels. In a further escalation, Beijing sanctioned five US subsidiaries of South Korea's Hanwha Ocean, accusing them of assisting American investigations that undermine China's national interests. The tit-for-tat measures have amplified investor anxiety over the potential drag on global trade and growth, keeping risk sentiment fragile across markets.

Beyond the trade headlines, the US government shutdown continues to drag on, adding another headwind for the Dollar. At the same time, markets are pricing in two additional Fed rate cuts by year-end amid signs of a weakening labor market. Traders will pay close attention to Fed Chair Jerome Powell's remarks later on Tuesday for fresh guidance on the monetary policy outlook, as he is set to speak at the National Association for Business Economics (NABE) Annual Meeting in Philadelphia at 16:20 GMT.

On the Canadian side, the outlook remains mixed. Recent data showed stronger job gains, hinting at some recovery in hiring, though broader economic momentum is still soft. Inflation eased to 1.9% in August, just below the Bank of Canada's (BoC) 2% target. Policymakers are therefore expected to maintain a cautious, data-dependent stance, with markets pricing roughly a 50% probability of another 25-basis-point interest rate cut at the October 29 meeting. Economists at major banks, including RBC, expect one more cut this year, while others, such as Scotiabank, note that firmer labour data could see policymakers pause temporarily.