Pound Rises as Energy Prices Surge, Inflation Risks Mount

The British Pound may see support against the US Dollar due to rising European natural gas prices and the risk of inflation.

Natural gas futures in the UK have surged by 62.5% since July, with the close on yesterday being the highest since January 2023. This increase is attributed to the surge in price after the Russia-Ukraine conflict.

The Bank of England may be forced to consider another rate hike due to these inflation risks, which could underpin the Pound. In the July Monetary Policy Report, the BoE used the futures curve in a 15-day period to a certain date prior to the release (in July's report it was 20th July) to analyze natural gas prices.

The hawks on the MPC, such as Catherine Mann, will likely highlight the energy-related inflation risks that have worsened and make it difficult for the BoE to ignore. A hike by the BoE is priced by year-end, making it more realistic given the natural gas price backdrop.