– GBP is the worst performing major
– The energy crisis in the United Kingdom cited
– Gas prices rise as Russia throttles supply
– Declines exacerbated by Evergrande’s concerns
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The pound is likely to remain under pressure as long as the UK energy crisis and the liquidation of global stock markets continue, but any sign of stability in these markets will turn out to be favorable.
The British currency is proving to be one of the most vulnerable of the world’s major currencies to a spike in gas prices which not only threatens to cut off British consumers but also severely hamper British industrial production.
Indeed, the UK is unique in its heavy reliance on gas for power generation, while a government cap on energy prices distorts the market and prevents many small utility providers from operating.
Four energy companies have had to go out of business in just the past four weeks, while the high price of gas means carbon dioxide production at one of the country’s largest producers has come to a halt.
Fears of an already under pressure UK supply chain increased in response, posing severe headwinds for the UK economy just days before a Bank of England meeting.
The price of British gas scheduled for delivery in October jumped 16% on Monday, after Russia capped additional flows to Europe.
Above: British Pound was the worst performing major currency on September 20.
Russian state supplier Gazprom chose not to send more gas to Europe via Ukraine in October, according to the results of an auction on Monday, according to reports.
The Telegraph says there were also signs that Russian flows through the key Yamal-Europe pipeline would remain limited, with traders reserving only a fraction of the capacity offered to bring gas to Germany next month through the station. Mallnow compression.
The newspaper says that within weeks of the start of the heating season, storage sites are less than 72% full, the lowest level for this time of year in more than a decade.
Above: ICE UK Natural Gas October 21 (NFV21)
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The pound-to-euro exchange rate fell to a two-week low of 1.1646 while the pound-to-dollar exchange rate fell to a one-month low of 1.3670.
For investors, there might be some difficulty in interpreting what the surging gas prices present to the pound: on the one hand, it implies higher inflation for longer, which should affirm market expectations for an interest rate hike in early 2022.
These rate hike expectations have given sterling support in recent weeks.
But on the other hand, rising gas prices are a major obstacle to consumer spending as well as industrial production, arguing in favor of higher interest rates at the Bank of England.
Such a revaluation by the markets would weigh on the pound.
Indeed, the market is currently betting on the latter, expecting sufficient economic headwinds to push the Bank within a deadline.
The gas crisis comes just days before the Bank of England’s September policy meeting scheduled for Thursday, where any warning about the UK’s prospects for economic growth could be interpreted as a “dovish” signal for the pound sterling.
“The pound could be weighed down as we expect the BoE’s result (Thursday) to be based on market prices,” said Eimear Daly, analyst at Barclays.
“The BoE’s inaction and the lack of a fiscal tailwind are limiting the rise in the pound sterling, but we remain constructive in the medium term given the undervaluation of the pound sterling,” adds Daly.
The UK economy is currently facing major supply challenges, as is much of the global economy, but energy supply now appears to be the most acute.
We reported last week that an energy crisis is looming in the UK given severe gas supply constraints in Europe, the main source of gas imported from the UK.
Meanwhile, the tight gas supply has been exacerbated by a prolonged period of stable weather conditions in the UK, which left the country’s wind farms contributing only 3.0% of the overall production of electricity of the country.
“We remain cautious on the pound given headwinds to growth due to supply constraints, the withdrawal of government support programs and higher taxes. The market is already forecast for two rate hikes in 2022. , so the risk is that the data ends up making ‘the tightening too scary’ as our economists like to say, ”says Daragh Maher, head of research, Americas, at HSBC.
HSBC says a series of disappointments in economic activity in the UK has been reflected in its Business Surprise Index, which has fallen sharply in recent times.
“The growth momentum is not just weakening, it is slowing down more sharply than expected,” says Maher.
Further disappointments in growth are becoming more likely given the crisis in the energy market.
The pound’s domestic woes, meanwhile, are exacerbated by a continued decline in global equity markets, with cautious investors choosing to liquidate their exposure to high-risk assets, opting for safer games instead.
The British pound tends to depreciate against the dollar, euro, franc and yen during periods of substantial stock market decline, depending on investor demand for safe-haven assets.
To highlight this dynamic, it should be remembered that the lowest values reached for the pound-euro exchange rate did not occur during the peaks of Brexit uncertainty, but rather during the stock market liquidations observed in 2008 (crisis financial) and 2020 (Covid crisis liquidation).
Global stock markets and commodities tumbled earlier in the week as ‘safe haven’ currencies found demand after China’s Evergrande group was seen heading for default, with little indication Chinese authorities would provide a lifeline.
The mega developer has two interest payments owed to bondholders on Thursday, one for $ 83.5 million and one for CNY 232 million.
“Risks in China abound with their eyes on the Evergrande contagion. Markets are also keeping an eye on inflation and the Fed’s meeting this week, as well as the German election on Sunday. Many people – most of them investors apparently – are looking at a correction in September / October after such a solid ramp this year and they are getting one, ”said Neil Wilson, chief market analyst at Markets.com.
Investors fear that a collapse of Evergrande will have negative effects on other Chinese and global stocks, as well as Chinese economic growth in general.
The crisis is just the latest setback in China’s economic growth which has lanes in a broader crackdown by authorities on tech stocks and the introduction of Covid-19 restrictions in some key regions and cities.
“The pound is facing two headwinds linked to the greenback’s security rush and the decline in global equities which are weighing down risk appetite and squeezing the UK currency,” said Joe Manimbo, analyst at main market at Western Union.
How much further declines in the pound could therefore depend on how quickly global investors repay their confidence.
“If you have the Fed post-max-accommodation – that is, on its way to tightening and not easing, inflation that persists far longer than optimists thought, With stalled earnings growth and an economy surpassing peak growth, you’ve got the kind of perfect powder keg for a pullback and Evergrande can be the spark to spark it, ”Wilson said.
“Add to that a German election and an energy crisis in Europe and it’s not the ideal backdrop for the risk,” he says.
A market analyst we follow says global markets are likely to remain under pressure over the next few days, pointing to further weakness from Thursday’s Bank of England event, if correct.
“Given the strength of this downward movement, it looks like we still have at least a few days of selling before a backwash develops,” said Chris Beauchamp, chief market analyst at IG.