Craig Ince
September 27, 2021

UK Energy Crisis Impacts Pound’s Standing

Sterling

Sterling/Euro rates were flat last week and encountered some losses based upon the failure and uncertainty of UK energy firms which is set to affect millions across the country. The pound managed to find some strength and touch the 1.17 level, this strength coming off the back of the latest Bank of England (BoE) meeting on Thursday. Interest rates were kept at a steady 0.1% but the committee warned inflation levels could soon tip over 4% towards the end of the year. Forecasts from the Bank earlier in the year expected inflation to be around 2.5% by year end. Nevertheless, the bank is still refusing to cut stimulus measures and provide any further news on the interest rate hike to counteract these advanced levels of inflation. The Bank’s September update surprised investors by being more ‘hawkish’ in tone than anticipated and money market pricing showed the probability of a 15 basis point hike in the interest rate happening in February 2022 had risen to 87%. Daniel Vernazza’s, chief international economist at UniCredit bank, views were supported by the BoE he suggested, ‘if unemployment does not rise materially then the monetary policy committee will likely tee-up a small (15bp) rate hike as soon as February next year ‘this is furthered by a 40 basis point of hike to 0.5% estimated by September 2022.

The September meeting caused two heavy hitting investment banks (Citi and JP Morgan) to change their expectations for a rate rise to early 2022, whilst Goldman Sachs had done the same earlier in the week.

The energy crisis is likely to continue to impact on the pound’s movements for the coming weeks, with the rising price of gas causing nine UK firms to go bust. The government are still planning on how they can bail out or provide assistance to these companies, across on the continent Spain and Italy have intervened in the pricing markets to relieve some pressure on their gas suppliers. Boris Johnson has been quick to play the situation of a cost-of-living crisis this winter down, by stating ‘spikes in gas prices- like food supply systems will soon end’. Jonathan Brearley the Chief Executive of OFGEM (the energy regulator) refused to support the optimism shown by Johnson, telling MPs that ‘its extremely difficult to predict the future price in Gas, wholesale price has leapt almost 6 times over the last year’ further going on to imply we are in ‘unprecedented territory’ and ‘you can’t rule anything out’ when he was questioned about the chances of the UK running out of gas.

Euro

This weekend saw Polling across Germany for the National Election, Angela Merkel who has been in charge since 2005 is not standing for the Election and will be replaced. It is the first time in post war Germany that the standing Chancellor is not seeking re-election. Olaf Scholz’s Centre-left Social Democrats (at the time of writing) led the polls by 1% over Merkels CDU party. Investors will keep a close eye on how things develop in Germany, with the country being the powerhouse economy of Europe. Some reports suggest this election could path the way for a new power structure in Europe. Italy and France are wanting to take a stronger role alongside Germany.

One way Italy has already started to increase its influence was reported by Nexi, an Italian Payments company, who recently announced they are working with the European Central Bank to develop a ‘digital Euro’ to complement the existing monetary system rather than replace physical cash. The news comes as many central banks around the world are looking into the same ideas, with the US federal reserve shortly releasing a research paper into the prospect of a digital currency. However, the ECB seem to be a few steps ahead with Nexi a company with $20 billion market share already assigned to design and construct the project. Nexi CEO, Paolo Bertoluzzo, was keen to downplay the role of Bitcoin, Ethereum etc. in cross border payments citing the wild price swings and ‘Silicon Valley statements’ are the exact opposite of what you need in payments.

This week sees Consumer price Index (CPI) data released on Thursday, these will give us a key insight into the levels of inflation and changes in purchasing trends across the continent. A general rule of thumb is a higher reading is better for the currency in question.

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