Pound Finds Support Amid European Energy Crisis

The British Pound is experiencing support against the US Dollar due to rising energy-driven inflation risks, according to MUFG. The bank highlights that natural gas prices in Europe are increasing, which could lead to another interest rate hike by the Bank of England.

Natural gas futures have surged 62.5% since July, with UK futures reaching their highest level since January 2023. This divergence in energy dynamics may support both the Euro and Pound against peers.

The Bank of England's Monetary Policy Report noted that natural gas futures prices peaked at over 123p in Q4 before declining to under 60p by the end of the forecast period. However, hawks on the MPC, such as Catherine Mann, will emphasize energy-related inflation risks, making it difficult to ignore weaker domestic economic conditions.

A hike by the Bank of England is now more realistic given the natural gas price backdrop. The natural gas price moves in Europe will fuel divergence and provide support for the euro and pound.