Currency exchange rates resilient to rising gas prices, pound and Norwegian krone have their five minutes (Daily analysis 6.09.2022)

The suspension of Russian gas supplies via Nord Stream did not cause a long-lasting panic on financial markets, which may have been helped by the Labour Day holiday in the US. The EUR/USD rate, reaching 20-year lows, slightly widened the 0.99-1.01 fluctuation range and quickly turned back towards parity. In the first part of the week, the strongest currencies are the pound sterling and the Norwegian krone.

Euro: new lows fail to trigger fresh EUR selling

The dollar reaching new 20-year highs against the euro failed to spark a new wave of the EUR/USD pair declines. Although the main currency pair has turned back towards parity, as long as the rate does not return above 1.01, it remains in a downtrend, and the real prospect is for it to reach 0.97.

Today, an ISM index reading reflecting sentiment in US services will be in the spotlight, but in truth, investors have already moved on to looking ahead to Thursday's European Central Bank meeting. We see a high probability of a sharp 75 basis point rate hike, which could support the single currency and show that the ECB is responding to the prospect of double-digit inflation but also actively countering EUR weakness.

Norwegian krone: OPEC+ sends signal that it will put the brakes on oil price falls

OPEC+ countries have agreed to lower their crude production target by 100,000 barrels per day from October. The decision implies a withdrawal from the planned increase announced a month ago but has a mainly symbolic aspect. Firstly, the target exceeds 42 million barrels per day. Secondly, in recent months, up to a few million barrels have been missing the production target and only Saudi Arabia, Kuwait and the United Arab Emirates have achieved the planned production. Against this background, it should be assessed that the decision will not significantly impact the balance between supply and demand for crude.

After a period of increasing output with the rebound in demand after the pandemic, it signals that OPEC + is ready to move to manage production to stabilise prices at a high ceiling. This suggests that the space for Brent barrel prices to fall below 90 USD per barrel may be minimal. This will impact the inflation path, both in Poland and globally. After all, in July, for example, falling prices at petrol stations interacted with lower CPI dynamics. At the same time, this is good news for currencies linked to the boom in energy commodity markets: among others, the Norwegian krone, which is leading the main currencies at the start of the week. The EUR/NOK pair should remain below the 10.00 barrier in the coming months.

Pound: GBP rebounds from long-term lows

Liz Truss, the current head of diplomacy, will be sworn in as UK Prime Minister today, as predicted and forecast. Shortly after the internal Conservative Party vote results were announced, plans were unveiled to relieve consumers from soaring electricity and gas prices. The average British household faces the prospect of an 80% increase in energy costs compared to the previous heating season. Bills are set to remain at current or lower levels, and lost revenue for suppliers is to be covered by government compensation. This is a gigantic fiscal burden, as bills are planned to be cut by more than 40% compared to the level implied by the latest projections. The cost to the UK budget is as much as 130 billion GBP. Assuming no government support, the bills would consume around 10% of household budgets.

Relief for consumers is good news for the badly battered pound, as it increases the chances of any growth in demand in the economy in 2023 and of avoiding the 1.5%t contraction in GDP currently assumed by official Bank of England forecasts. With fiscal easing comes space for stronger rate hikes, ending the cycle at a higher level (below 4.5%) and later than currently priced in (early next year). In a year, the monetary policy has gone from being an asset to a ball and chain for the UK currency, which has gone from leader to grumbler among the main currencies. The economy rebounded quickly due to a smooth COVID-19 vaccination campaign and the lifting of restrictions. Thanks to this, the Bank of England raised rates at the end of last year, long before the Fed, not to mention the ECB, and was the first to soften the tone: relatively slow to raise rates and rocketing with pessimism.

The pound's exchange rate against the dollar rebounded on Monday, and only the NOK is stronger against the GBP. However, exaggerated optimism may be premature, as this came from levels close to the bottom of a pandemic slump in the British currency, which has lost as much as 15% to the US dollar this year. Liz Truss began her time in office by taking on the British people's most serious concern and attempting to restore confidence in a government badly damaged by Boris Johnson. In time, relations with the European Union may come to the surface on the former Foreign Secretary's political agenda. Friction over the Northern Ireland Protocol (work is underway in the British parliament to exclude parts of its provisions) could potentially lead to open conflict with Brussels and the termination of the free trade agreement. This is the most significant potential risk to the British economy and the pound.