Euro fell to two-decade lows on gas shortage concerns

European stocks will likely open lower as investors focus on the energy dispute between Moscow and the West. The euro fell to new lows after Moscow vowed to keep its main gas pipeline to Germany shut. While traders await the ECB rate decision on Thursday, where officials are set to raise interest rates to combat rising inflation. The markets will likely remain volatile on Monday after Labor Day. OPEC+ is meeting on Monday to discuss cutting output to support oil prices. Fed Chair Jerome Powell is scheduled to make an appearance before the central bank moves into its blackout period before its next meeting.

ECB meeting

As inflation in the Eurozone approaches double digits, the ECB will likely deliver a second hefty rate hike at its upcoming meeting on Thursday. Eurozone inflation soared to 9.1% in August, well above the ECB's 2% target, as soaring energy costs exacerbate the cost-of-living crisis.

Despite the looming prospect of a recession this winter, investors are only wondering whether the central bank will deliver another 50-basis-point hike or an even more significant 75-basis-point rise.

As it is not fully priced in, a move like this, along with some hawkish commentary, could boost the euro, triggering a short-term rally. At the same time, natural gas prices have started to fall. However, even if EUR/USD rallies in the wake of a surprisingly higher rate hike, the pair needs a decisive break above 1.036 to form a reversal.

Russia-west gas dispute

Russia's gas and oil export standoff escalated Friday as Moscow vowed to keep its main gas supply pipeline to Germany shut down, and the G7 announced a planned price cap on Russian oil exports aimed at cutting Russian resources in the war in Ukraine.

There are growing fears of winter gas shortages due to the recent Nord Stream pipeline shutdown, which Russia says will last as long as it takes to carry out repairs, which could cause the major economies to go into recession and lead to energy rationing as a result.

A number of European governments have accused Russia of weaponizing energy supplies in the aftermath of Russia invading Ukraine in an effort to conduct an "economic war" with the West. Russian officials blame Western sanctions and technical issues for supply disruptions.

Unless countries prepare in advance for a complete cut-off of Russian gas supplies to Europe, a cold winter could reduce GDP across the European Union by as much as 1.5%.

Oil

Crude oil prices rose more than $1 a barrel as investors await the OPEC+ meeting later in the day. Despite tight supply conditions, it is possible that the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, may decide to keep current output levels or even cut production to boost prices. 

According to local media estimates, 33 Chinese cities are currently under partial or complete lockdown as the world's second-largest economy adheres to its zero-COVID policy.

Besides the recession fears, there has been no progress in the West's efforts to revive its 2015 nuclear deal with Iran that could possibly allow Tehran to increase exports and improve global supplies. According to Western diplomats, a day after Iran reopened the issue, the White House rejected linking the deal to the closure of UN nuclear watchdog investigations.