Europe’s energy problem is once again becoming an important issue for currency markets. Oil prices moved above $100 a barrel earlier in September as the Middle East conflict disrupted supply, while European wholesale natural gas prices are more than 140 percent higher than a year ago. At the same time, the euro has weakened, with EUR/USD falling to around 1.142 on September 23, its lowest level since late July.
That does not mean expensive energy automatically sends the euro lower. But Europe remains unusually exposed to energy shocks, and another prolonged period of high prices could make the economic outlook harder just as the European Central Bank is trying to control inflation.
Europe Still Imports Most Of Its Energy
The basic problem is simple: Europe produces less energy than it consumes.
According to Eurostat, net imports supplied 57 percent of the European Union’s energy needs in 2024. Oil and petroleum products accounted for 67 percent of EU energy imports, while natural gas contributed another 24 percent.
This makes rising global energy prices more painful for Europe. When oil and gas become more expensive, European households and businesses pay more, while the region also has to spend more on energy imported from abroad. That can squeeze disposable income, raise company costs and put pressure on the economy.
The latest shock has been significant. Brent crude crossed $100 a barrel on September 9 and was still around $99 on September 23. Brent remained about 37 percent above its level when the current Middle East conflict began in late February.
Energy Is Keeping Inflation High
The second problem is inflation. Euro-area inflation rose to 3.3 percent in August from 2.9 percent in July, according to the ECB. Energy inflation jumped to 14.3 percent from 10.3 percent.
The ECB also says changes in wholesale gas prices are now reaching consumers faster than they did after the 2022 energy crisis. In more than half of euro-area countries, changes in wholesale gas prices can now feed into gas inflation within just one to three months.
That helps explain why the ECB raised its key interest rates by another 25 basis points on September 10. Its latest projections put average inflation at 3.0 percent in 2026, while economic growth is expected at only 0.9 percent.
The ECB Faces An Uncomfortable Trade-Off
Normally, higher interest rates can support a currency because they can make assets denominated in that currency more attractive. But an energy shock makes the picture more complicated.
ECB Vice President Boris Vujcic has warned that persistently high energy prices can push inflation higher while also weakening economic growth by reducing household incomes and spending. In simple terms, the ECB could be forced to fight inflation created by expensive energy while the same energy shock is already hurting consumers and businesses.
That is not an ideal combination for the euro. More rate hikes may support European yields, but if investors become increasingly worried about weaker growth, some of that support for the currency could disappear.
What This Means For EUR/USD
The euro’s recent weakness shows that markets are already weighing these risks. On September 23, EUR/USD fell to around 1.142, while the US dollar index climbed to a two-month high of around 100.88.
However, Europe’s energy problem is only part of the move. Judging by the DXY chart, the dollar is also being supported by expectations that the Federal Reserve could raise interest rates further if US inflation remains high.
For the euro, the key question is therefore how long the energy shock lasts. If oil and gas prices remain elevated through winter, Europe could face weaker household spending, higher business costs and more inflation pressure at the same time. But if Middle East tensions ease and energy prices fall sustainably, one of the biggest pressures facing Europe would begin to fade.
For EUR/USD, the next major move may therefore depend not only on what the ECB and Federal Reserve do with interest rates, but also on something much more basic: how much Europe has to pay for its energy.