Norwegian gas fields restartingGBP up against EUR, USDBut Russia tightens supplyLeaving GBP and EUR exposed

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The British Pound was better supported in mid-week trade as UK and European gas prices recovered somewhat on news a major strike in Norwegian gas fields would now be avoided, although supplies from Russia remain constrained.

Strikes which had threatened to cut off most of the UK and Europe's gas imports from Norway have been called off with the Norwegian labour ministry confirming it had stepped in to end industrial action set for later this week.

This is a significant development for the Pound and Euro which fell sharply against the Dollar over the previous two days amidst surging European gas prices which threatened ever higher inflation and declines in economic activity.

These price rises were linked to news of Norwegian strikes which could have threatened up to 60% of the country's imports at a time Russia continues to squeeze supplies.

The Pound to Euro exchange rate has risen back to 1.1675 meaning bank accounts are quoting around 1.1350 for euro payments and independent providers are offering around 1.1640.

The Pound to Dollar exchange rate plummeted by over a percent Tuesday but is back to 1.1980 on the spot market, this means bank accounts are seeing rates as low as 1.1560 on dollar transfers while independent specialists are offering at around 1.1943.

Above: GBP/USD (top) and GBP/EUR (bottom) at daily intervals. GBP is better supported against the EUR and USD.

The British Pound, Euro and other European currencies had come under immense selling pressure over the first part of this week and look set to remain vulnerable to further losses against the Dollar as Europe's energy crisis deepened.

"Fears of a gas crisis are overshadowing everything," says Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank. "A gas supply crisis would be an Europe-specific problem."

In the context of an "Europe-specific problem" the UK is included given the interconnectedness of its gas market with Europe.

This is in turn reflected in the fall in Pound Sterling alongside the Euro against the Dollar as concerns over European energy security intensified on a string of headlines that included a squeeze in Russia gas supplies.

Norway’s state-backed energy company, Equinor, had shut down three oil and gas fields since Monday and warned further fields were to shut.

Reuters estimated up to 25% of the country's gas supply could be offline by Saturday.

The FT however said up to 60% of Norway's supplies were under threat having quoted Gassco, the state-owned pipeline operator, as saying "in a worst-case scenario, deliveries to the UK could stop totally".

Ahead of potentially major gas supply disruptions questions will be asked about existing storage in the affected markets.

European nations have replenished much of their gas storage facilities with the International Energy Agency reporting Tuesday the European Union experienced a strong storage build-up during the second quarter of 2022.

But the UK's only major storage facility, owned by Centrica, was shut in 2017 leaving the country particularly exposed.

Centrica shut the facility saying the government refused to continue subsidising what amounts to a strategic reserve.

Above: TTF month-ahead prices. TTF is the European gas pricing benchmark. Image source: Bloomberg.

Worryingly from a UK context the government has done little to address the growing crisis with the political classes of Westminster putting their full focus and energies on the future of Prime Minister Boris Johnson.

Although fears over Norwegian gas field strikes have eased news Russia is further squeezing supplies to Europe with the closure Tuesday of the Yamal pipeline will serve as a reminder the outlook for the Euro and Pound remains fragile.

The Nordstream 1 pipeline is seeing flows reduced further ahead of a full scheduled shutdown in coming days.

"Nordstream 1 will undergo maintenance beginning July 11, and there’s a good chance that it might not come back on-line. As of last week, flows were 60% lower than where they were for most of 2021," says Bipan Rai, Head of North American FX Strategy at CIBC Capital Markets.

Analysts say the Euro could now be on course for a fall to parity, or even lower, against the Dollar as focus falls on Germany's energy-intensive industrial economy, which is particularly exposed to gas shortages.

News reports suggest the German government could soon start rationing gas supplies.

"Germany’s plan if the gas crisis deteriorates is to move from phase 2 to phase 3 of its rationing scheme. Industry would see its gas supplies rationed. This risks a significant amount of disruption to manufacturing and German exports, something that even COVID-19 lockdowns failed to achieve," says Jordan Rochester, a foreign exchange strategist at Nomura.

Rochester says the Euro is set to lose further ground as the Eurozone's export power house looks to grind to a halt on the back of surging energy prices.

"This would significantly hit the euro area’s trade balance and also lead to widespread shortages pushing up prices," says Rochester. "Germany’s power crunch is getting worse".

Nomura say moves over the course of Tuesday have raised their confidence levels the Euro can fall further.

"We have an even higher conviction that EUR/USD will breach parity towards 0.98 in August, with the risk of a non-linear move towards 0.95," says Rochester.