MUFG highlights that rising European natural gas prices are reviving inflation risks, which could push the Bank of England toward another rate hike and underpin the Pound. While crude Oil remains contained, UK natural gas futures have surged, and the bank notes that this divergence in energy dynamics may support both the Euro and Pound against peers.

Natural gas surge underpins BoE hike risk

“As we have highlighted this week, the natural gas backdrop in Europe is certainly pointing to upside inflation risks. Crude oil prices have been more contained but the UK natural gas front future price has gained 62.5% since the start of July and the close yesterday was the highest since January 2023 following the surge in price after the start of the Russia-Ukraine conflict.”

“In the July Monetary Policy Report the BoE as always used the futures curve in a 15-day period to a certain date prior to the release (in July’s report it was 20th July) which basically had the natural gas futures prices peaking at a little over 123p in Q4 before declining to under 60p at the end of the forecast period.”

“Still, the hawks on the MPC, like Catherine Mann, will no doubt highlight the energy-related inflation risks that have actually worsened and therefore makes it more difficult to ignore due to the offsetting weaker domestic economic conditions.”

“For the BoE, the backdrop does not look as urgent and the data provides continued scope for the BoE to remain more patient than the ECB. Today’s panel topic does not suggest Catherine Mann will use this opportunity to provide an update on her monetary policy views but given her hawkish leanings any comment would likely focus on the potential need to act.”

“A hike by the BoE is priced by year-end and that is looking 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.”