Dollar Strength vs. Pound and Euro Fueled by Higher Oil and Gas Prices

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The Dollar's rally against the Euro and Dollar could find fresh fuel from rising oil and gas prices, say analysts.

The Euro and British Pound slumped against the Dollar at the start of the year, with some analysts concluding that rising energy costs are playing a significant role.

Brent crude oil prices have risen by $6/bbl, while natural gas prices doubled between September and December, pointing to rising cost pressures facing UK and European businesses.

According to Jeremy Boulton, a Reuters market analyst, this dynamic favours the dollar, which is the currency of the world's largest exporter of both oil and gas.

The surge in gas prices is, meanwhile, particularly problematic for the eurozone and the UK.

"The pound was the worst performing G10 currency on the opening day of 2025, falling by 1.25% at one stage with fears over growth in Europe remaining a key focus for investors," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank Ltd.

UK wholesale gas prices rose to £126.190 per therm on January 02, the highest level recorded since January 2023. The UK is facing an economic crisis as rising gas prices are added to a bevvy of cost pressures that include this year's impending hikes in minimum wages and employer tax increases.

The Pound to Dollar exchange rate (GBP/USD) dipped by a per cent on January 02, which is the biggest daily fall since the USD surged on Donald Trump's election victory in November.

UK month-ahead gas prices.

Gas prices rose steadily through 2024 amidst global competition for sea-borne Liquified Natural Gas (LNG), a source of gas Europe has become increasingly reliant on.

The European benchmark 1-month TTF natural gas contract has risen by nearly 27% since the middle of December.

This will increase pressure on Germany's already struggling domestic industrial base.

"EUR/USD, which is by far the most influential currency pair, has started this year by falling to its lowest since November 2022. The move has underpinned the dollar against other currencies, in particular much less liquid emerging currencies," says Boulton.

GBP/USD investment bank consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/USD. Please request a copy here.

Gas prices rose through November and December as Europe experienced a relatively cold start to the winter season, prompting a drawdown on the region's gas reserves.

By the start of the year reserves stood at 72% of capacity, the lowest in the post-Ukraine invasion era. On January 01 it was confirmed Ukraine would cease the transfer of Russian gas to Eastern Europe after letting an existing transfer deal expire on January 1.

"The theme of energy price rises is again in focus and there has been another sharp rise in natural gas prices following the end of gas supplies running through Ukraine with Ukraine refusing to renew a transit contract with Russia that helps lift Russia’s revenues from energy sales," says Halpenny.

Compounding issues at the start of 2025 is a shutdown of Norway's giant Hammerfest gas export plant owing to technical failures. Norway is now Europe's largest piped gas supplier.

Forecasts for early January point to cold and windless conditions, which means Europe's windmills will remain idle, prompting further drawdowns of gas reserves while raising bids for seaborn cargoes of LNG.

The UK has virtually no gas reserves, while a multi-year government policy of closing domestic oil production is given fresh impetus by the Labour government which took power last July.

"The UK’s lack of storage capacity leaves it more vulnerable to market price moves and has increased fears over further utility price increases this year," says Halpenny.

Looking ahead, Boulton thinks the Dollar's run higher can extend from here.

"Unlike 2022, when investment in the dollar became crowded prompting a correction, there is far less invested in the greenback now, and judged by moves in emerging markets there is growing demand. Drops into uncharted waters for many currencies may limit the supply of dollars, leading to an even faster rise in its value," he explains.