The UK became the first G7 country to hit double-digit inflation in July, with economists predicting worse to come.

The Eurozone meanwhile is staring down the barrel of an energy crisis this winter. Russia has cut the flow of natural gas supplies through the Nord Stream 1 pipeline to 20% of its original capacity. If energy prices continue to soar as forecast, what could the impact be on GBP/EUR? And what factors caused the movements in the currency pair so far?

The Eurozone response to the energy crisis
Following the beginning of Russia’s war on Ukraine, the European Commission sought to reduce the continent’s reliance on Russian energy supplies.

Gazprom has now cut gas flows to just 20% of the pipeline’s capacity due to delays in turbine deliveries, citing Western sanctions as the cause for the delay, with analysts claiming that supply cut was in direct response to EU sanctions.

The move from Gazprom prompted energy costs across the Eurozone to soar as nations attempted to stockpile fuel ahead of winter. This in turn contributed to record high inflation.

Additionally, a study conducted by Germany’s Institute for Employment Research (IAB) released at the beginning of August predicted that the country’s economy could shed more than €265bn as a result of the crisis.

Is the UK closer to a recession?
The UK has also suffered this year amid soaring energy costs, adding to the country’s cost-of-living crisis, with 85% of households reliant on gas boilers.

A lack of competition in the UK energy market also heaped pressure on consumers. The end of 2021 saw the collapse of multiple energy firms due to rising gas costs and a lack of hedging; analysts predicted that the government bailout of suppliers such as Bulb could add additional costs to household bills.

Energy costs are expected to directly drive inflation higher. The Bank of England (BoE) predicted in August that inflation would surpass 13% by the end of the year.

Has the crisis caused volatility in GBP/EUR?
The global energy crisis has had a pronounced effect on the GBP/EUR exchange rate since February, with the rise in energy prices and UK inflation seeing the currency pair fall even lower.

Gazprom’s cut to Eurozone gas supplies in June initiated a period of sustained weakness for the euro; as gas prices continued to climb, the GBP/EUR exchange rate made up lost ground as Eurozone recession fears persisted. The euro also found some support at the end of August. The European Union announced that they would be introducing measures to uncouple electricity from gas to try and bring down prices.

Can you secure the best rates despite volatility?
Energy prices are likely to continue to fluctuate in the coming months. Analysts remain uncertain as to whether Gazprom will cut off supplies through the Nord Stream 1 pipeline altogether. If Eurozone countries such as Germany fail to sufficiently fill their gas supplies before winter, then it could see the euro fall to fresh lows.

High energy costs in the UK are also set to impact inflation in the country. With UK inflation now forecast to hit 22% in 2023 by some institutions, the soaring energy costs could prompt additional volatility in the pound.

Working with a currency broker like Currencies Direct can help to you to secure the best rates in this climate. Tools such as forward contracts and limit orders can enable you to secure the ideal rates for your currency exchanges.

Currencies Direct has over 20 offices and more than 500 currency experts around the world. In the Algarve it has relocated to Albufeira (near the old bullring roundabout). If you want to discuss your requirements or arrange a transfer, pop in and have a chat with your dedicated Account Manager. You can also move your money over the phone, or use the online service and app to check live rates and make 24/7 transfers. Currencies Direct is authorised yo operate in the EU – and regulated by a relevant EU authority. Additionally, Currencies Direct has a five-star rating on online review platform Trustpilot, is a multiple winner of the MoneyAge Money Transfer Provider of the Year award and have been trusted by over 325,000 individuals and businesses to move money abroad since 1996.