British Pound: Energy-driven inflation risks support GBP against US Dollar – MUFG

According to a research note from MUFG, surging European and UK natural gas prices are reviving inflation risks, providing fundamental support for the British Pound against the US Dollar and other major currencies. While crude oil prices remain comparatively contained, UK natural gas front-month futures have rallied 62.5% since the beginning of July, closing at their highest levels since January 2023. MUFG points out that the Bank of England's July Monetary Policy Report assumed natural gas prices would peak around 123p in the fourth quarter before dropping under 60p. However, the worsening energy price trajectory makes inflation harder to ignore for Monetary Policy Committee members, particularly hawkish officials like Catherine Mann. Consequently, market pricing for a potential Bank of England interest rate hike before the end of the year is becoming increasingly realistic. This divergence in energy price dynamics and central bank policy expectations is expected to provide ongoing upside support for both the Pound and the Euro against peer currencies.