The GBP EUR exchange rate jumped higher on the day as gas supply fears returned for the European Union. Analysts expected a positive month of trade but were wrong as exports slowed again and the Yamal pipeline shut down. There was also news of industrial action in Norway. The situation is likely to get worse as we head into the winter months. Russia will hold the cards on European energy supply as we get closer to colder weather.
The GBP to EUR was higher by 0.40% at 1.1654 after an early spike to 1.1700.
Gas supply fears come back into the spotlight for the euro
The euro was stronger on ECB tightening expectations over the last month. However, traders ignored the looming threat of energy supplies in the bloc.
That strategy took a hit today as the pound sterling spiked against the euro on news of a shutdown of the Yamal-Europe pipeline.
German gas operator Gascade said flows at the Mallnow metering point on the German border dropped to zero. Gas prices were higher on Monday after news of industrial action in Norwegian gas fields. Russia’s Gazprom leveraged the development, reducing the short-term supply. A gas supply crisis would be specific to Europe. If things go awry, it would primarily affect Europe, impacting the ECB’s monetary policy. This constitutes an “idiosyncratic EUR weakness,” says Ulrich Leuchtmann, Head of FX at Commerzbank.
Dutch gas futures jumped towards a four-month high, following the latest headlines. They will put the squeeze on European inflation numbers.
Bank of England’s Bailey sees strong banking system
The Bank of England Governor commented on the strength of the banking system despite the global conditions. Since the publication of the last FSR, the outlook of the global economy fell significantly. On the whole, financial conditions tightened markedly, Bailey noted in Tuesday’s speech. Despite a diminished outlook, he asserted that the “UK banking system remains strong”.
UK banks saw strong revenues for the financial year and came in fourth in annual revenue behind the US, China, and Canada. The UK banks also topped their French rivals on revenue for the first time since 2015.
A new Bank of England report painted a gloomier picture for households with further threats of higher prices for food and energy. The report noted that developments in relation to Russia’s invasion of Ukraine are an important factor, affecting both the global and UK outlooks, especially if energy and food prices increase further.
Furthermore, increased and continued inflationary pressures may lead to weaker economic growth across the globe. This will result in a sharper tightening in global financial conditions and the possibility of “volatility and stress in financial markets.”
The pound sterling versus the euro may have found support after the recent failures to breach 1.1600 and is set to move higher.
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