Rising NGAS costs may pose downside danger to the Euro, UK economic outlook looks bleak

Summary:

• Euro held steady throughout Asian trading.
• Energy Bills Support Scheme's concurrent expiration, may have a greater negative impact on household earnings.
• NZD has had the best performance among major currencies over the past month.

Euro faces downside risk

The market is reflecting mixed signals for this currency pair. Following the turbulent start to the week on Monday, when the EUR/USD fell, the Euro held steady throughout Asian trading. The Fed speakers' continued hawkish posture, which also hurt markets, helped the US dollar increase. Risk assets were also hurt by a rise of Covid-19 cases in China because of concerns that harsh lock downs would continue there.

Even while experts at one European bank claim there is "less pain in the pipeline" for the region and its single currency, rising natural gas costs in the Eurozone are recognized by foreign exchange strategists as a downside danger to the Euro. According to analysts, the little increase in gas prices coincides with a drop in temperatures across Europe after an abnormally warm autumn that allowed nations to stockpile gas supplies and use less gas than is customary at this time of year.

✕ EUR/USD Price Chart

GBP under pressure from poor UK economic outlook

The market is reflecting bearish signals for this currency pair. Early in the new week, the Pound to Euro exchange rate continued to rise after last Friday's advance, but after three straight days of gains, Sterling is now rapidly approaching a crowded area of technical resistances near and above the 1.16 level on the charts, suggesting that the rally may soon come to an end.

The problem for families, the economy, and the pound is that, as a result of reforms outlined by Chancellor Jeremy Hunt in last Thursday's budget, energy costs are expected to grow dramatically once more starting in April 2023, when the average annual tariff would rise by another 20% to £3,000. Due to the Energy Bills Support Scheme's concurrent expiration, this will have a greater negative impact on household earnings. However, it will also have a positive impact on UK inflation rates and have additional effects on the state finances.

✕ EUR/GBP Price Chart

NZD supported by improved investor sentiment

Although the New Zealand Dollar has had the best performance among major currencies over the past month, one analyst claims that it is beginning to seem "stretched" in front of the Reserve Bank of New Zealand's upcoming interest rate announcement. The Kiwi has risen against all of its G10 counterparts over the past four weeks, helped by a noticeable improvement in investor sentiment worldwide and as investors raised their expectations for the amount of interest rate hiking to come from the RBNZ in response to a series of domestic data releases that exceeded expectations.

Following New Zealand's October Q3 CPI inflation announcement, which exceeded estimates and bolstered expectations for a 75bp hike, the market increased its expectations. Data on the labor market and quarterly wages also confirmed these predictions. However, an analyst questions if the RBNZ will want to speed up rate increases given that it was among the first to act and has consistently moved rates by 50 basis points, and has no need to play catch-up given that it is one of the G10 rate leaders.

✕ GBP/NZD Price Chart

Sources: finance.yahoo.com, dailyfx.com, poundsterlinglive.com