Increasing energy shock weighs on euro, ECB tests rates

Increasing energy shortages in Europe could weigh further on the euro after Russia shut off key gas taps, portending a cold and difficult winter for businesses and households.

German-led European nations announced measures over the weekend to deal with a cost-of-living crisis and rising energy prices, after Russian state-owned gas producer Gazprom announced on Friday it would indefinitely halt supplies through a key pipeline to western Europe.

The shared currency opened slightly lower in early trade in Sydney earlier in the new week, slipping 0.1 percent against the greenback to $0.9946.

Markets are now focused on the August low of $0.9901. A break below this level would take the pair to its weakest level since December 2002.

“The outlook for Europe is grim – things started to get choppy late last week and are almost certain to get worse,” said Gordon Shannon, portfolio manager at TwentyFour Asset Management.

The energy crisis has deepened since Russia’s invasion of Ukraine sent commodity prices skyrocketing and damaged ties between the Kremlin and Europe.

This was a key factor in bringing the euro to par with the US dollar last month for the first time since 2002.

New pre-winter energy supply pressures threaten to weigh further on the regional economy, while rising consumer prices are putting pressure on the European Central Bank (ECB) to tighten monetary policy.

“The ECB was just beginning to catch up with the Fed on rate hikes, but if we go into a prolonged recession I think that will slow down their attempts,” Shannon said.

There are growing expectations that the ECB will hike rates by 75 basis points as early as Thursday.

The decision remains a challenge as ECB Chair Christine Lagarde and her colleagues navigate the twin problems of high inflation and an impending recession.

In a sign of the seriousness of the problem, Germany unveiled an aid plan worth around €65 billion on Sunday, while Finland said it would stabilize the electricity market with a €10 billion scheme.

Sweden announced a €23 billion emergency backstop for its utilities to avert a broader financial crisis.

Meanwhile, analysts at Goldman Sachs, led by Kamakshya Trivedi, lowered their forecasts for the euro to 97 cents from 99 cents in the next three months, they said in a note on Friday, before the various bailout packages were announced.

They also believe that the euro will remain below par with the dollar over a six-month period. They previously forecast a recovery to $1.02 per euro.

“While the eurozone has made good progress in accumulating gas storage for the coming winter, this has come at the cost of significant demand erosion from production cuts and does not fully remove the risk of a more severe disruption in the winter,” they said in the note. Increasing energy shock weighs on euro, ECB tests rates

Fry Electronics Team

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