Pound-Euro Jumps 0.80% as EU Gas Prices Spike on Russian Retaliation

Gazprom subsidiaries sanctioned

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The Euro was battered amidst another spike higher in natural gas prices, this time on news Russia was making fresh moves to restrict supplies to Europe.

The Euro fell through a near-term floor against the Dollar and could be on course to test parity on current trends say some analysts, but losses were also notable against Pound Sterling and the majority of other G10 currencies.

The near-ubiquity of Euro losses therefore confirms the currency is weighed down by idiosyncratic factors.

Natural gas prices soared in Europe on Thursday on news Russia was sanctioning energy companies, specifically a key Polish pipeline that could squeeze supplies to Europe further.

Russia sanctioned EuRoPol GAZ SA, the owner of the Polish part of the Yamal-Europe gas pipeline.

Russia also sanctioned units of Gazprom Germania and dozens of other companies based in countries that have imposed sanctions on Russia in response to its invasion of Ukraine.

31 companies were listed on May 11 by the Russian government and they are now banned from conducting transactions and entering Russian ports.

Gas prices surged and markets were trading deep in the red, with Germany's DAX down more than 2.0%.

The Euro to Dollar exchange rate slumped 0.75% to trade at 1.0436.

"The bottom line is that we can't accurately price the risk of a disruption to Europe's gas supplies, but if it happened, the risk of EUR/USD breaking parity would be substantial, and that keeps the natural urge to start building a long-term position in euros at bay," says Kit Juckes, FX Strategist at Société Générale.

The Pound to Euro exchange rate surged by 0.80% to trade at 1.1725, confirming markets see the UK as being an arms length away from Europe's energy woes. (Set your FX rate alert here).

Euro vs. Dollar and Pound

Above: EUR/USD (top) and GBP/EUR (bottom) at five minute intervals.

It was also reported the flow of Russian gas in a key pipeline to Europe through Ukraine has been disrupted due to siphoning by Russian occupying forces, according to Ukraine’s gas grid operator.

Gas flows were suspended from 7am on Wednesday at the Sokhranivka point, through which a third of Russian gas that transits Ukraine passes, Ukraine’s Gas Transmission System Operator (GTSOU) said.

The reason was that it had lost control of equipment in occupied territory, the operator said.

"With the euro area economy highly dependent on Russian gas and oil, we expect the euro to be the most affected G10 currency by the war in Ukraine," says economist Claudio Wewel at J. Safra Sarasin, the Swiss private bank and wealth manager.

Although UK gas prices are also rising it is reported Britain has an "unprecedented glut of liquefied natural gas", that gas which is shipped in from the U.S. and Middle East.

It is offloaded at British ports in liquid form, gasified, and then sent to Europe via interconnected pipelines.

This has meant UK gas supplies for next day delivery tumbled to pre-energy crisis lows at one point this week ahead of news of Russian sanctions.

The Times reports demand for gas in Britain has dropped with warmer weather and there is not enough pipeline capacity to transport all the gas that has arrived in the country to mainland Europe where it is needed.

Fuel imports and exports

Source: Macrobond, Bank J. Safra Sarasin, 09.05.2022

According to the report, LNG cargoes have been arriving at terminals in Britain with the aim of transferring them through the national network and on to Europe via subsea pipelines.

"The rate of LNG imports has exceeded the ability of the interconnector pipelines to export gas, leading to an imbalance in gas supply and demand in the UK, amplified by the UK’s lack of meaningful gas storage capacity compared to other European gas consumers," analysts at Stifel told The Times.

UK day-ahead gas prices dropped to about 40p a therm at the start of the week, down from more than 500p a therm in March.

By contrast, prices in mainland Europe remained high on Monday at more than 200p a therm at the same point.

This provides a compelling narrative for Pound-Euro upside as it suggests Eurozone inflationary pressures might be under appreciated, particularly when contrasted to the UK where negativity has reached a saturation point.