Euro debate: Farage and Lacalle see energy crisis as key to EUR’s future
15:00, 1 September 2022
Many analysts and investors are of the view that the value of the euro will struggle against the dollar (EUR/USD) as Europe's energy crisis deepens and causes recession risk to increase.
Capital.com chief market strategist, David Jones, spoke to Nigel Farage and Daniel Lacalle about the future of the euro and how they think the energy crisis has, and will affect Europe’s single currency.
Euro vs dollar (EUR/USD) exchange rate chart
Farage, the former leader of UKIP and a former commodities trader, now political commentator with his own TV show on GB news, has opposed the euro as a single currency right from the start.
In contrast, Daniel Lacalle, fund manager and chief economist at Crisis, one of Spain's biggest wealth management firms, has a positive view on the euro.
EUR/USD and the energy crisis correlation
For context, the euro broke below the parity level (1.0000) against the US dollar again on 22 August 2022 and has struggled to hold onto gains since.
“The recent price action in EUR/USD hasn't been driven by the widening of interest rate differentials between the Fed and the ECB, but rather by the widening price differential between European and US natural gas,” says Piero Cingari, market analyst at Capital.com.
“The US Henry Hub’s discount to the European Dutch TTF expanded to a record of $63/MMBtu as the Europe gas crisis worsened after Gazprom decided to temporarily stop gas supplies through Nord Stream 1. This huge cost difference in a widely used energy commodity weighs on the eurozone's fundamentals compared to the US,” Cingari adds.
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US natural gas spot price chart
Will the euro dip further as the energy crisis deepens?
So, what do Farage and Lacalle think about the euro’s performance as the energy crisis deepens and as the bloc struggles to find enough commodity supplies to get through winter?
“The euro has sunk against the dollar. I suspect that's got more to do with energy and the fact that Europe has pursued an idiotic policy,” says Farage, referring to Europe’s reliance on Russian oil and gas.
“I suspect the pound’s in the same boat – I mean, look what’s going on in economics and global politics. It’s all about work and energy. The intelligent countries decided they’d be self-sufficient. But now there’s ‘follow the goddess Greta Thunberg’.
“They've decided ‘we won’t produce our own energy because that wouldn’t allow us to get to net zero. We'll just bite off that nice Mr Putin’. So, I suspect that those currency moves are going to continue.”
Lacalle notes: “As Nigel says, the energy element is very important. But there’s also an important element, which is the China slowdown, which is making the trade surplus of the eurozone be significantly lower than it would be anyhow because of the massive increase in imports of energy.”
Russia energy blockade
Russian state-controlled energy producer Gazprom has decided to halt its gas flows into Germany through the NordStream 1 pipeline for three days of maintenance. European gas prices soared on the news.
Capital.com’s Cingari explains further: “All major natural gas price benchmarks skyrocketed in unison. The European Dutch TTF reached a new high of €290/MWh. It has increased by 80% in the last month and by 600% year-on-year. Natural gas prices in the United Kingdom reached 566 GBp/thm, a level not seen since their peak in March. They increased by 70% in the last month and by 403% year-on-year.”
Farage makes a similar point: “I do fear that the really big risk in the world economy at the moment is that gas prices, already at record levels, could go sharply higher this winter. I can't see Putin wanting to be nice to the West in any way at all.”
Lacalle sums up in similar vein: “The weakness of Germany, a trade surplus falling to a massive trade deficit and the energy element, which I completely agree is crucial, are elements that are going to continue to keep the euro weak.”
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