Will Europe face energy cuts this winter?

Euro Uncertain as ECB Keeps Raising Rates, While Europe Faces Energy Crisis

Posted Monday, September 5, 2022 by
Skerdian Meta • 2 min read

The European economy has been weakening and last month’s services report showed that this sector is approaching contraction, although it’s still holding just above water. This week the European Central Bank ECB is expected to deliver a 0.75% interest rate hike, after the 0.50% hike in the last meeting.

Although the Eurozone economy is heading into a recession, and rate hikes will only make the situation worse. Besides that, northern European countries are announcing packages worth billions of dollars to help with the energy shortage which is coming in winter.

Via the Wall Street Journal

  • Over the weekend Sweden & Finland announced up to (around) USD33bn in energy guarantees
  • Swedish and Finnish government … programs designed to make sure electricity producers can meet exchange … margin calls.
  • Stockholm is home to Nasdaq Clearing AB, a subsidiary of Nasdaq Inc. that processes most derivative trades in the Nordic power market, which includes Finland and the Baltic countries.
  • Under the Swedish plan, the government would provide guarantees to eligible companies, which could then use the guarantees to borrow from banks and pay the exchange clearinghouse.
  • Swedish government … to extend up to 250 billion kroner, or $23 billion, in guarantees
  • Finnish government plans to offer 10 billion euros … in guarantees.

The measures were packaged up citing ‘financial stability’ concerns, and at worse case a ‘financial crisis’. The Journal summary is interesting:

  • When utilities agree to deliver gas or power, they lock in prices by selling futures contracts. Exchanges charge one payment, known as initial margin, when trades are placed to collect collateral. They then call for or return money each day depending on whether the position gains or loses value.
  • As prices rise, utilities’ short positions shed value and the companies pay the exchange. They recoup the money when they deliver gas or power, but the difference in timing has led to massive outflows of cash that some firms have struggled to fund. At times a vicious cycle has emerged in which extreme price moves boost margin calls, prompting companies to bail out of trades and sparking more volatility.

So, the Euro is in a bit of a dilemma right now, as is the USD, hence the hesitation to push this pair either way meaningfully. It keeps trading in a 200 pip range as the price bounces between 0.99 and 1.01 and will do so until either the ECB or the FED start giving stronger signs again that they will slow down with rate hikes.

EUR/USD H4 Chart – Hanging Around 1.00

Sellers are not ready yet for another push lower

EUR/USD Live Chart

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