google-play

Scan to Download iOS&Android APP


EUR/USD analysis: EU/US natural gas spread to push euro below parity?

11:23, 16 August 2022

Share this article
In this article:

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
100 euro banknote on a gas burner. The concept of cost for natural gas. Energy crisis.
100 euro banknote on a gas burner. The concept of cost for natural gas and Energy crisis in Europe – Photo: Leka Sergeeva/Shutterstock

Since the beginning of the conflict between Russia and Ukraine, Europe has been hit by the worst energy crisis in its history, with European (Dutch Title Transfer Facility) and American (Henry Hub) natural gas price differentials widening at all-time highs and the EUR/USD currency pair dangerously close to parity levels.

According to the most recent CME Group data, US Henry Hub spot prices are currently trading at an equivalent of $57/MMbtu discount compared to Europe's Dutch TTF benchmark as of mid-August 2022.

The link between EUR/USD and Henry Hub-TTF spread has increased significantly over the course of the summer, with the rolling 90-day correlation coefficient rising to 0.79. This is basically telling us that the lower US natural gas prices trade compared to the European Dutch TFF prices, the stronger the downward pressure on the EUR/USD pair.

From a macro standpoint, the Russian gas crisis is likely to cause a more severe economic downturn in Europe than the US. Widening TTF-Henrty Hub gas price spread makes European firms less competitive than US firms in terms of input costs and also reduces real wages and household incomes in Europe more than in the U.S.

Has the market correctly priced in a recession in Europe because of the energy crisis? If so, has EUR/USD reached its bottom? Or can the gas crisis still get worse, causing the pair to break below the parity level?

What is your sentiment on EUR/USD?

0.98330
Bullish
or
Bearish
Vote to see Traders sentiment!

Chart to watch: EUR/USD is tied to Henry Hub-Dutch TTF natural gas spread

a chart showing EUR/USD and Henry Hub Dutch ttf price spreadEUR/USD vs Henry Hub-Dutch TTF price spread and correlation analysis as of August 16, 2022 – Photo: Capital.com / Source: Tradingview

EUR/USD macro outlook: Will the euro fall below 1.00 on plummeting EU economy?

a chart showing plummeting Germany ZEW Economic Sentiment Index as of August 2022,

Germany ZEW Economic Sentiment Index as of August 2022 – Photo: Capital.com / Source: Tradingview

a chart showing diverging trends in the Eurozone vs United States balance of trade

Eurozone vs United States balance of trade (1-year rolling comparison as of August 2022) – Photo: Capital.com / Source: Koyfin

a chart showing diverging trends in the Eurozone vs United States wage growth

Eurozone vs United States: real wage growth – Photo: Capital.com / Source: Tradingview

a chart showing plummeting Germany ZEW Economic Sentiment Index as of August 2022,

Germany ZEW Economic Sentiment Index as of August 2022 – Photo: Capital.com / Source: Tradingview

a chart showing diverging trends in the Eurozone vs United States balance of trade

Eurozone vs United States balance of trade (1-year rolling comparison as of August 2022) – Photo: Capital.com / Source: Koyfin

a chart showing diverging trends in the Eurozone vs United States wage growth

Eurozone vs United States: real wage growth – Photo: Capital.com / Source: Tradingview

1/3

The European gas crisis is wreaking havoc on the economy of the Eurozone and this effect has already been quite visible on the EUR/USD trend in 2022. 

The ZEW Indicator of Economic Sentiment for Germany, a leading forward-looking indicator of the Eurozone GDP growth, fell to -55.3 in August 2022, down from -53.8 in July and below market expectations of -53.8. It is the lowest reading since October 2008, when the Great Financial Crisis began.

The persistently strong trend in inflation and the anticipated increase in heating and electricity costs during the winter continue to harm the Eurozone's economic outlook. As a result, if the US inflation rate may have reached its peak, Europe is still a long way off.

The US, a major oil and gas producer, has not experienced the same increases in energy prices as Europe, as demonstrated by the Henry Hub-TTF natural gas spread. In the absence of Russian gas, Europe has increasingly imported Liquified Natural Gas (LNG) at higher prices from the United States and other suppliers.

Consequently, the trade balance of the Euro area has deteriorated significantly, with a deficit of EUR 200.7 billion in the first half of the year, compared to a surplus of EUR 83.2 billion in the same period of the previous year. The US trade balance is also in deficit, but it has improved in recent months, aided by soaring energy exports.

GBP/USD

1.12 Price
+0.460% 1D Chg, %
Long position overnight fee -0.0020%
Short position overnight fee 0.0001%
Overnight fee time 21:00 (UTC)
Spread 0.00013

USD/JPY

144.35 Price
-0.040% 1D Chg, %
Long position overnight fee 0.0042%
Short position overnight fee -0.0100%
Overnight fee time 21:00 (UTC)
Spread 0.014

GBP/JPY

161.35 Price
+0.420% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0000%
Overnight fee time 21:00 (UTC)
Spread 0.036

AUD/USD

0.65 Price
+0.080% 1D Chg, %
Long position overnight fee -0.0038%
Short position overnight fee 0.0004%
Overnight fee time 21:00 (UTC)
Spread 0.00006

Looking at the Eurozone's real wage growth dynamics - a key metric for forecasting the trend in real household incomes and consumption spending - we are currently at the lowest level on record (-6.2%). This is going to produce a negative effect on the Eurozone's consumption this winter.  In contrast, the nominal wage growth in the United States is still outpacing inflation, resulting in positive real wage growth.

In summary, Europe is more directly affected by the natural gas crisis than the United States, and it is highly likely that Europe will continue to experience higher inflation and slower economic growth for an extended period of time. 

EUR/USD forecasts: What to expect next?

Investors have already been quite bearish on the EUR/USD pair this year, mainly due to the widening interest rate gap between the Federal Reserve and the ECB.

Along with the economic growth and interest rate disparities between the two regions, the more severe natural gas crisis that Europe is experiencing compared to the United States is now a key macro factor affecting the EUR/USD exchange rate.

Traders should then keep a close eye on the Dutch TTF/Henry Hub spread as a key indicator of supply disruptions in the European and American gas markets.

If the European gas crisis worsens in the coming months, the price differential between Dutch TTF and Henry Hub natural gas could widen further, which would likely cause the EUR/USD pair to fall below the parity threshold.

A de-escalation in the Russia-Ukraine conflict, coupled with a decline in the price of Dutch TTF gas, will be a key factor in preventing a further depreciation of the single currency. However, this scenario appears less likely.

 

Read more...

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Still looking for a broker you can trust?


Join the 450.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account

2. Make your first deposit

3. You’re all set. Start trading