Energy-Inflation Divergence Fuels GBP Support Against USD
The British Pound may be supported against the US Dollar due to rising European natural gas prices, according to MUFG. This increase in energy costs is reviving inflation risks, which could prompt another rate hike by the Bank of England and bolster the Pound.
While crude oil prices have remained relatively contained, UK natural gas futures have surged 62.5% since the start of July, reaching their highest level since January 2023 following the Russia-Ukraine conflict.
As highlighted in the BoE's July Monetary Policy Report, the bank used the natural gas futures curve to forecast inflation risks. However, with UK natural gas prices now peaking at over 123p in Q4 before declining to under 60p by the end of the forecast period, the hawks on the MPC, such as Catherine Mann, may argue for a rate hike due to worsening energy-related inflation risks.
The BoE's decision-making process is complicated by weaker domestic economic conditions, but MUFG believes that with a hike priced in by year-end, it's looking increasingly realistic given the natural gas price backdrop. This divergence in energy dynamics may also provide support for both the Euro and Pound against their peers.