• Prior 5.25%
• Bank rate vote 6-3 vs 6-3 expected (Greene, Haskel, Mann voted to raise by 25 bps)
• Statement details to follow..

This article was written by Justin Low at www.forexlive.com.

●For approximately 500 days (in 2021–2023), Europe was
gripped by an unprecedented energy crisis that was characterised by record-high
prices—especially for natural gas.

●Supply issues induced by the changing
geopolitical landscape have been the central cause of the crisis.

●After reaching an extraordinarily high
level of €311 per MWh in the summer of 2022, natural
gas prices have dropped by more than 80% by winter 2023, but they remain more
than two times higher than their long-term historical average.

●Europe has managed to withstand the most acute phase of the
crisis but at a rather large cost.

●Overall, Europe has adapted and managed to
accumulate substantial natural gas inventories, but the situation remains
fragile and prices volatile.

●Although the probability of an energy
crisis returning this winter is relatively low, such possibility still remains.

While there are
many aspects of the energy crisis in Europe within several markets, including
crude oil, coal, electricity, and emission allowances, as well as within
several domains, such as EU energy policies and regulation, diplomacy and
international relations, this article will focus exclusively on the natural gas
market, because it is here where the energy crisis has been most pronounced.

Europe faced an
unprecedented energy crisis for around seventeen months (from September 2021 to
February 2023), as coal, natural gas, and electricity prices surged to all-time
highs. Governments across the continent rushed in to introduce energy-saving measures
and implement conservation policies, while households and businesses had to cut
consumption rapidly.

Moreover, the
conflict in Ukraine has disrupted energy supplies as the European Union (EU)
has prohibited the maritime transport of Russian crude oil and has set a target
for the bloc to phase out imports from Russia by 2027. Furthermore, three of
the four lines of the Nord Stream pipeline were damaged by unknown explosions,
limiting Europe’s supply options. Either way, importing cheap pipeline gas from
Russia no longer seems like a viable option for Europe as relations between the
two actors remain strained.

Now, as 2023 draws
to a close, can we confidently conclude that the energy crisis in Europe is
over? How prepared is Europe to cope with the upcoming winter? What are the
risks and challenges that lie ahead?

History

Kar Yong Ang, Octa
analyst, has succinctly summarised the context: ‘Europe’s energy
crisis was long in the making. As the global economy recovered from the
recession caused by COVID-19, the demand for LNG [liquified natural gas] surged
in the summer of 2021. However, the supply could not immediately cope with the
rising demand, so prices across the globe went up. Higher prices, coupled with
LNG supply constraints and sluggish European production, prevented the European
states from restocking natural gas to adequate levels before the winter.
Another shock came in December 2021, when gas flows from Russia along the Yamal
Europe route dropped sharply—ostensibly due to maintenance. Then, as you know,
the armed conflict in Ukraine broke out, taking the whole continent to a
totally different reality and sending energy costs to the stratosphere.’

Natural
gas price in Europe (Title Transfer Facility, TTF)

The
energy crisis’s most acute phase occurred in the summer of 2022. One only needs
to look at the evolution of Europe’s benchmark natural gas price (TTF) to
assess the scale of the emergency (see the chart above). On 25 August 2022, TTF
price reached €311 per megawatt-hour (MWh), the highest level ever recorded. On
that specific day, the price was 44% above the previous maximum reached on
March 7, 2022, and was a staggering 18 times higher than the three-year average
price recorded over 2019-2021. Despite Europe’s gas storage sites being 78%
full in August 2022, supply worries were rife as imports from Russia dropped by
around 60%, forcing Europe to rely extensively on liquefied natural gas (LNG)
imports—especially from the United States. However, the aggregate supply of LNG
in the global market at that time was reduced as one of the U.S. LNG export
plants—Freeport LNG—had to go offline due to an explosion incident. Thus, to
secure an adequate number of LNG cargoes, Europe had to outbid other customers
in South and East Asia by agreeing to pay higher prices to suppliers.

A lot has changed
since last summer. Europe has adopted and managed to reduce demand, find new
suppliers and build natural gas stocks to comfortable levels. The European gas
prices have returned to normality but remain above the level observed before
the crisis. On Monday, 6 December, the front-month futures contract for
delivery in January at TTF settled at €39.25 per MWh, 87% below the peak
observed in August 2022 but still some two times above the historical average
seen in 2019-2021. Kar Yong Ang, Octa analyst singles out several reasons for
normalisation:

‘Although natural gas prices in Europe remain higher than they were
before the crisis, the situation has improved dramatically. Indeed, the
contrast with 2022 looks quite impressive. There are several reasons for this.
First, there was a structural loss of demand partly due to reduced economic
activity and partly due to conservation policies. Second, imports of pipeline
gas from Norway have increased, as well as LNG imports from the United States
and other countries. On top of it, there was a bit of luck as well, as weather
conditions allowed the Europeans to build the stocks faster than normal.’

Indeed, probably
the most painful yet effective adjustment that Europe had to endure was the
loss of demand. According to Eurostat, total
gas use in the EU’s top 6 consuming countries—Germany, Italy, France,
Netherlands, Spain, and Poland—was down by 17% in the first ten months of 2023
compared with the five-year average for 2017-2021. Obviously, energy-intensive
industries such as chemicals and steel production had to bear the brunt of
adjustment. For example, according to Statistisches
Bundesamt, Germany’s energy-intensive manufacturing production has decreased
by about 20% since the start of 2022 and has not shown any signs of recovery
yet.

At the same time,
however, as consumption went down, so did local supply. According to Eurostat, total
indigenous production in the EU’s top 6 gas-producing countries—Germany, Italy,
Hungary, Netherlands, Poland, and Romania—was down by 41% in the first ten
months of 2023 compared with the five-year average for 2017-2021. The key
reason for the continuing drop in production in Europe is the gradual phasing
out of the Groningen natural gas field, Europe’s largest one, where a series of
earthquakes led the government to shut down production.

Thus, Europe had to
rely on imports more and more to balance its natural gas market. Russia has
long been the main supplier of affordable pipeline gas into Europe, but
geopolitical tensions, sanctions, and explosions of the Nord Stream pipeline
have brought the flows to a minimum. According to Eurostat, Russia
exported just 22.3 billion cubic metres of natural gas into Europe in the first
nine months of 2023, which is 57% lower than during the same period in 2022 and
65% lower than during the same period in 2021. Concurrently, imports of LNG
from the United States reached 30.01 billion cubic metres during the first nine
months of the year, up a whopping 185% from the same period in 2021.

Another factor that
helped Europe fill the supply gap and live through the volatile months of 2022
was pure luck. Indeed, the unusually warm winter in 2022–2023 lowered the
heating demand and allowed the European states to start building stocks earlier
than usual. This year’s weather conditions have also been quite favourable.
Windy and wet weather increased electricity generation from renewable sources,
while mild temperatures in November have delayed the onset of winter heating.

‘Overall, Europe has managed to bring its
natural gas inventories to a rather comfortable level and is now well-protected
to withstand future supply shocks,’says Kar Yong Ang,
Octa analyst. Indeed, according to the latest data from Gas Infrastructure
Europe, gas storage levels are at record highs for this time of the year at
around 94% full, said Octa analyst, adding that the general bias for TTF price
remains bearish. ‘I would not be surprised to see European
natural gas prices drop to €30 per MWh in case of a normal winter.
Alternatively, if this upcoming winter turns out to be colder than normal, we
might see TTF temporarily hitting €60 per MWh.’

However, Kar Yong
Ang says that different kinds of challenges and risks lie ahead for Europe. ‘Some
European states have secured a number of long-term import deals with major LNG
producers, which, on the face of it, is a good thing. But, it appears that
Europe is placing too much faith in LNG. It’s betting too much on a single
supply source, which may backfire in the long run. If Europe is to permanently
replace relatively cheap pipeline imports from Russia with relatively expensive
LNG imports, then, I am afraid, economic activity in its traditional industries
may never recover to the pre-crisis levels, and in fact, deindustrialisation
may kick in full force.’

Indeed, Europe’s
top competitors—the United States and China—benefit from lower prices. The
United States has ample resources at home, while China is getting cheap imports
from Russia. Europe risks losing its competitive standing in the global
marketplace. Furthermore, as we explained at the beginning of the article, the
temporary shutdown of a single LNG export plant in the U.S. has already
highlighted how strongly European energy security is now connected with the
intricacies of the global LNG market.

‘All 27 member states of the EU have been
net importers of energy since 2013, and this status is unlikely to change in
the foreseeable future. With supply options more limited than in the past, European consumers will have to get used to
more volatile natural gas prices, as they will increasingly be determined by
the whims of the weather and by the bargaining power of other LNG importers in
Asia,’ saysKar Yong Ang, Octa analyst.

Europe has survived
the energy crisis and managed to adapt but has done so at the cost of lower
demand and reduced economic activity. Now, Europe will have to learn to
navigate the global LNG trade successfully to secure the most favourable deals.

About
Octa

Octa is an international broker that has been providing online
trading services worldwide since 2011. It offers commission-free access to
financial markets and various services already utilised by clients from 180
countries who have opened more than 42 million trading accounts. Free
educational webinars, articles, and analytical tools they provide help clients
reach their investment goals.

The company is involved in a
comprehensive network of charitable and humanitarian initiatives, including the
improvement of educational infrastructure and short-notice relief projects
supporting local communities.

In the APAC region, Octa captured the
‘Best Forex Broker Malaysia 2022′ and the ‘Best Global Broker Asia 2022′ awards
from Global Banking and Finance Review and International Business Magazine,
respectively.

This article was written by FL Contributors at www.forexlive.com.

It’s been more or less a straightforward one so far in European morning trade, with traders sticking with the sell the dollar, buy everything else mood. The more dovish Fed yesterday is the main driver still, all before we get a more of a mix of the BOE and ECB later on. The dollar’s struggles come as Treasury yields are also falling further, with 10-year yields now hitting below 3.95% on the day:

The USD/JPY chart above shows a further technical breakdown in the pair, falling past its 200-day moving average (blue line) now and that tees up a potential drop towards 140.00 next.

A more dovish BOE and ECB could be further catalysts to drive further gains in the Japanese yen, à la lower bond yields globally.

Going back to the dollar, EUR/USD is seen up 0.5% to 1.0925 currently and GBP/USD up 0.4% to 1.2675 on the day. As equities are also ripping higher in European trading, commodity currencies are also benefiting with AUD/USD up 0.9% to 0.6715 and NZD/USD up 0.7% to 0.6215 currently.

This article was written by Justin Low at www.forexlive.com.

Yesterday, the Fed kept interest rates
unchanged as expected but that’s not what the market was looking for going into
the event. The market was focused solely on the Dot Plot and the Fed decided to
validate the market’s dovish pricing projecting a 2024 year-end peak rate at
4.6%. The expectations were for the Fed to keep two rate cuts for 2024, but the
Fed decided to increase that to three, basically agreeing with the market that
rate cuts are coming.

Moreover, Fed Chair Powell didn’t
push back against the strong dovish pricing and even said that they are focused
on not making the mistake of holding rates high for too long, which suggests
that a rate cut could come pretty soon. This gave a strong boost to the Dow
Jones leading to new highs with the sentiment turning heavily bullish.

Dow Jones Technical
Analysis – Daily Timeframe

On the daily chart, we can see that the Dow Jones made
a new all-time high yesterday following the Fed’s pivot. This rally incredible
rally has been a straight line since the end of October with almost no
opportunities to catch a decent pullback. Chasing the price now doesn’t look
like a good idea from a risk management perspective, although the FOMO can be
really strong now.

Dow Jones Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can see that we
have a trendline now
connecting the most recent swing lows. If we get a pullback from the all-time
high, the buyers are likely to lean on the trendline where they will also find
the red 21 moving average for confluence.
Moreover, we can see that the latest leg higher is diverging with
the MACD, which
is generally a sign of weakening momentum often followed by pullbacks or
reversals.

Dow Jones Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can see that the
price recently broke out of the consolidation marked by the blue box and
extended the rally to new highs. We can also notice that on this timeframe, the
buyers will find the 50% Fibonacci
retracement level around the trendline and the moving
average for extra confluence. The sellers, on the other hand, will want to see
the price breaking below the trendline to position for a drop into the 35683 support.

Upcoming Events

Today we will see the latest US Retail Sales and
Jobless Claims figures, while tomorrow we conclude the week with the US PMIs.

This article was written by FL Contributors at www.forexlive.com.

Since the retreat from 1.1000 at the end of last month, the pair was caught in and around the 100-day (red line) and 200-day (blue line) moving averages. But after the dollar slumped following the FOMC meeting yesterday, buyers took the call to action to break above the latter and that is seeing the bias in the pair shift to being more bullish.

The dollar softness today is extending, with the pair trading up 0.3% to 1.0910 currently. However, the euro side of the equation will also come into play later on with the ECB coming up next.

As things stand, traders are pricing in a whopping 154 bps worth of rate cuts by the ECB for next year. The odds of a March rate cut have moved up to ~77% with nearly 50 bps priced in already for April. In other words, the Fed’s dovishness has set up more expectations of a quicker move by other major central banks going into next year.

That being said, it is important to remember that not every economy is the same. The so-called disinflation process seems to be farther along in the US than the Eurozone, especially when you consider the most recent PMI data takeaways here.

However, there is also the narrative that the euro area economy is slowing down much faster than the US. And so, if the ECB wants to, they can opt to spin the rhetoric accordingly and focus on that to tee up rate cuts following the timeline priced in by markets at the moment.

EUR/USD may be primed for a retest of the 1.1000 mark based on the technicals. But the euro side of the equation could offset the dollar weakness that we are seeing at the moment, keeping the balance of flows more balanced towards the end of the week.

This article was written by Justin Low at www.forexlive.com.

• Prior +2.8%
• Market index 194.5 vs 181.1 prior
• Purchase index 149.6 vs 144.5 prior
• Refinance index 445.8 vs 373.3 prior
• 30-year mortgage rate 7.07% vs 7.17% prior

This article was written by Justin Low at www.forexlive.com.

As a reminder, the debt brake serves to cap spending by the government and limits the country’s structural budget deficit. Scholz says that should the Ukraine conflict become worse, the government will have to respond by looking to declare an emergency exception for the budget – which will see the debt brake suspended as it has been since the Covid pandemic.

Scholz notes that the government will be saving €17 billion in its core budget and will also cut spending from its climate and transformation fund. For some context, Scholz was actually supporting the idea for another suspension of the debt brake whereas finance minister Lindner was against it. And that resulted in intense discussions and debate over the matter in recent weeks.

This article was written by Justin Low at www.forexlive.com.

GBP

• The BoE kept interest rates
  unchanged as expected at the last meeting.
• The central bank is leaning towards
  keeping interest rates high for longer, although it keeps a door open for
  further tightening if inflationary pressures were to be more persistent.
• The BoE members continue to repeat
  that they will keep rates high for long enough to get inflation back to target.
• The latest employment report missed
  forecasts with wage growth coming in much lower than expected and job losses in
  November.
• The recent UK CPI missed
  expectations across the board, which was a welcome development for the BoE.
• The UK PMIs beat expectations on
  both the Manufacturing and Services measures, with the Services sector crawling
  back in expansion.
• The latest UK Retail Sales missed
  expectations across the board by a big margin as consumer spending remains
  weak.
• The market expects the BoE to start
  cutting rates in Q2 2024

JPY

• The BoJ kept its monetary policy basically
  unchanged at the last meeting but formally widened the YCC to 1% on the 10-year
  JGBs stating that it will be a reference cap.
• Governor Ueda repeated once again
  that they won’t hesitate to take easing measures if needed and that they are
  not foreseeing sustainable price increases.
• The latest Japanese CPIshowed that inflation pressures are easing although
  they remain well above the BoJ’s 2% target.
• The latest Unemployment Rate
  remained unchanged near cycle lows.
• The Japanese Manufacturing PMI fell
  further into contraction, but the Services PMI ticked higher remaining in
  expansion.
• The latest Japanese wage data beat
  expectations and as a reminder the BoJ is focusing on wage growth to decide
  whether to tweak its monetary policy.
• The BoJ Governor Ueda last week
  delivered some interesting comments where it looked like the central bank was
  indeed considering rate hikes in 2024.
• The market expects the BoJ to hike
  rates in Q2 2024.

GBPJPY Technical Analysis –
Daily Timeframe

On the daily chart, we can see that GBPJPY tumbled for
hundreds of pips after breaking below the key support at the trendline and the
50% Fibonacci retracement level. This huge move was an overreaction to BoJ’s
Governor Ueda comments where he hinted to rate hikes coming in 2024. The price
then pulled back from overstretched levels into the blue 8 moving average where
we got a rejection. The next target for the sellers should be the 176.32 level.

GBPJPY
Technical Analysis – 4 hour Timeframe

On the 4 hour chart, we can see that the price
keeps on getting rejected from the trendline as the sellers continue to step in
with a defined risk above the trendline to position for new lows. The buyers
will need the price to break above the trendline to start targeting new higher
highs.

GBPJPY Technical Analysis –
1 hour Timeframe

On the 1 hour chart, we can see that the
price might now consolidate between the trendline and the recent low at 182.30.
The playbook should be straightforward:

• A breakout to the upside should see the buyers
  piling in for a rally into the previous support now turned resistance around
  the 185.00 handle.
• A breakout to the downside should lead to more
  bearish bets and the sellers targeting new lows with the 176.32 level as the
  first target.

Upcoming Events

Today, we have the US PPI
data followed by the FOMC rate decision where the Fed is expected to keep
interest rates unchanged. Tomorrow, we have the BoE rate decision where the
central bank is expected to keep rates unchanged and later in the day, we will
see the latest US Retail Sales and Jobless Claims figures. On Friday, we
conclude the week with the Japanese, UK and the US PMIs.

This article was written by FL Contributors at www.forexlive.com.

The SNB will also be part of the mix and while not many are talking about the Swiss central bank, they are one of the few ones to have really surprised markets over the last two years. The latest one was to hold its policy rate unchanged at 1.75% in September here. So, are they now expected to be on pause mode for an extended period?

Let’s take a look at some analyst expectations going into tomorrow’s decision.

BofA

• Rates on hold at 1.75%
• SNB is likely on a longer pause than the ECB now
• No change in language surrounding the Swiss franc for the time being
• First rate cut only expected in Q3 2024

Goldman Sachs

• Rates on hold at 1.75%
• SNB to lower inflation forecasts, while acknowledging lower inflation in the Eurozone and US too
• No pressure for the SNB to cut as quickly as other central banks given „relatively low rate peak“
• First rate cut only expected in September 2024

UBS

• Rates on hold at 1.75%
• Inflation forecast to be revised lower
• SNB likely not decided on any FX intervention yet moving forward
• No changes expected to tiering framework
• First rate cut projected for June 2024, with policy rate seen at 1% in December 2024

Nomura

• Rates on hold at 1.75%
• SNB to communicate „weaker verbal commitment to FX sales“
• Swiss economy has a deflation problem rather than an inflation problem
• In that lieu, inflation likely to approach 0% again by the end of 2024
• SNB to revise lower its inflation forecasts
• First rate cut expected in June 2024

This article was written by Justin Low at www.forexlive.com.

• Prior -1.1%; revised to -1.0%

Euro area industrial output slumps by more than expected to start Q4, reaffirming the ongoing recession in the manufacturing sector. Here’s the breakdown:

This article was written by Justin Low at www.forexlive.com.