Europe's Energy Crisis Sparks Inflation Fears

Rising European natural gas prices have reignited concerns about inflation, despite crude oil remaining relatively stable. Since early July, UK natural gas futures have surged by 62.5% to their highest levels since January 2023.

This sudden increase in energy costs is forcing the Bank of England to reassess its assumptions on gas prices. In its July Monetary Policy Report, the central bank predicted that gas prices would peak at around 123p in Q4 before easing to under 60p by the end of the forecast horizon. However, current market conditions now suggest a more significant spike.

The energy price gap is also influencing global currency and interest rate markets. As a result, derivative traders are pricing in a Bank of England rate rise by year-end, which would support sterling's resilience.