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Bannockburn Global Forex Drivers for the month ahead October 1, 2021 View Online Economic Calendar October 4: Reserve Bank of Australia October 5: Reserve Bank of New Zealand October 8: China returns from Golden Week October 8: US September Employment Report October 12: UK Employment Report October 13: US Consumer Price Index October 19: Hungary’s Central Bank October 20: UK Consumer Price Index October 21: Turkey’s Central Bank October 22: Russia’s Central Bank October 27: Brazil’s Central Bank October 27: UK Budget October 27: Bank of Canada October 28: Bank of Japan October 28: European Central Bank October 29: Eurozone CPI October 2021 FX Outlook The foreign exchange market gives insight into the global political economy. While the US Congress plays a dangerous game of brinkmanship over the debt ceiling, investors prefer the US dollar to any other major currency and most emerging market currencies. Only two currencies managed to appreciate against the greenback, the Russian ruble (~0.7%) and Chinese yuan (~0.25%). The Federal Reserve is set to begin reducing its bond purchases in November, and the Fed funds futures are pricing in a hike next September and has discounted about a 30% chance of a second hike in 2022. The latest Fed forecasts showed officials were split about even one hike next year. The dollar’s gains accelerated after the FOMC meeting, and new highs for the year were recorded against the euro, yen, and sterling. China’s ongoing campaign to bring households, investors, and businesses to heel is unsettling investors, but it was the demise of a large property developer that shook global markets briefly. The Hong Kong stock market, where many mainland companies are listed, fell by 5%, among the poorest performers in September, the fourth consecutive monthly decline. Continue reading below... Rising energy prices and the ongoing supply chain disruptions are threatening to become a real drag on growth. The UK has been particularly hard hit as labor market rigidities post-Brexit are revealed, complicating the energy squeeze that has shuttered at least ten small distributors and forced the government to use soldiers for driving trucks. The past three downturns in the US were preceded by a doubling of the price of crude. The price of West Texas Intermediate crude oil has more than doubled over the past year. Germany and Japan will have new governments, but the impact for investors is modest. In both cases, there is a strong sense of continuity. Canada went to the polls as well, but the Liberals were returned as a minority government despite losing the popular vote for the second consecutive time. The state of emergency has been lifted in Japan, and an economic rebound in Q4 is forecast, helped by a stimulative budget before national elections expected toward the middle of November. In Germany, Finance Minister Scholz appears positioned to lead a center-left coalition. The eurozone and Japan will lag in this interest rate cycle, and a weaker euro and yen appear to suit local policymakers. A stronger dollar may serve to help dampen US inflation. Still, we suspect the market may have overshot interest rate expectations in the US and UK. According to the Commitment of Trader, the large short dollar speculative position in the futures market at the start of the year has been reversed on many pairs. Click here for the full monthly outlook