European Energy Prices Fueling British Pound, Euro Weakness

European Energy Outlook:

• Both EUR/USD and GBP/USD rates hit fresh yearly lows today.
• European and UK natural gas prices rallied to all-time highs, as did prices on future contracts for Germany.
• Surging energy prices increased speculation around a deeper economic downturn for the Eurozone and the UK.

FX Declines Powered by Energy

It’s a bleak day in FX markets for the British Pound and the Euro, with both EUR/USD and GBP/USD rates hitting freshly yearly lows on the session. Senior Strategist James Stanley discussed the Euro’s malaise this morning, while last week we discussed how the UK is facing stagflation concerns, which have been weighing on the British Pound.

A resurgent US Dollar ahead of the Federal Reserve’s Jackson Hole Economic Policy Symposium is partially to blame, but the fact of the matter is that the British Pound’s and the Euro’s problems may be more closely tied to what’s happening in energy markets and the crisis that is unfolding rapidly ahead of the winter months.

No matter where you look, energy prices for Europe are soaring. Both the European benchmark – Dutch TTF – and UK natural gas prices have reached (or are reaching) all-time highs:

DUTCH (TTF1!) [BLUE] and UK (UKG1!) [ORANGE] NATURAL GAS PRICES: DAILY CHART (August 2021 to August 2022) (CHART 1)

Rising natural gas prices for Europe are spilling over to prices in futures for German and UK electricity for the December 2022 contracts:

German Power Baseload Electricity Futures (DEBZ2022) [BLUE] and UK Base Electricity Futures (UBLZ2022) [ORANGE]: DAILY CHART (August 2021 to August 2022) (CHART 2)

Climate change may be at fault, as record low levels on major European waterways – the Thames River in the UK, the Rhine River in Germany – are reducing available hydropower as well as access to water for cooling at nuclear power plants. In October 2021, we discussed how climate change and mitigation efforts could exacerbate energy supply issues.

But Russia’s invasion of Ukraine is also to blame, with the tit-for-tat response to the sweeping Western sanctions back at the forefront amid an unexpected announced shutdown of Nordstream 1 from August 31 to September 2.

Regardless of what happens with the Bank of England and the European Central Bank, the British Pound and the Euro are likely tethered to what happens in energy markets for the foreseeable future. On days like today when Dutch and UK natural gas prices rise, it’s going to be bad news for the two major European currencies.

— Written by Christopher Vecchio, CFA, Senior Strategist