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The EU has launched legal proceedings against Britain, the second pandemic wave in Europe may have already peaked

In most financial markets, everything suggests a rather standard session, which has not yet deviated from normal. The same goes for recently released macro data which has not yet become more pronounced. On the British pound currency pairs, on the other hand, we are witnessing significant volatility as a result of EU legal action against Britain and a breach of the controversial Brexit agreement. In Europe, meanwhile, we are seeing signs that the peak of the second pandemic wave may be nearing to an end. This could gradually calm European stock markets.

 

The EC gives Britain a month to comment on the breach of the agreement

EC President Ursula von der Leyen announced today that the EC has launched legal proceedings against Britain for breaching of the Brexit agreement. The EU has asked the British government to delete passages violating the binding Brexit agreement from the controversial bill but with no avail. However, the British government passed the proposal on Tuesday, undermining the fragile relations between the two camps as well as mutual trust. The proposal should ensure free trade between all parts of Britain. However, it violates the Northern Ireland protocol, which is one of the pillars of the agreement. According to it, Northern Ireland should remain part of the union's single market in order to avoid establishing a hard border with the Republic of Ireland. Britain’s deadline for submitting its comments is until the end of October. However, the process can take years, with the only possible punishment for Britain being a mere penalty from the UE Court of Justice.

 

The British government objects that the proposal will only come to play in case both parties will fail to reach a mutual agreement by the end of the year. Furthermore, the British cabinet stated today that it must create legal certainty in order to protect its obligations to Northern Ireland. Therefore, the volatility on British currency pounds is through the roof today. The pound initially weakened sharply and subsequently strengthened above its current highs. The mentioned strengthening was caused by the reports of both camps allegedly approaching to the agreement as one of the final negotiating rounds is coming to an end. Official news is not yet available, but it was enough for the pound to strengthen. This only confirmed that Brexit will be the main driving force on pairs with a pound during October.

 

Chart: 5M chart GBPUSD (Source: cTrader PurpleTrading)

 

The second pandemic wave seems to be slowing down

Just a day after the announcement of the state of emergency in the Czech Republic, which will take effect next week, a report from Imperial College London was published in Britain, which supported the hope that Britain has already peaked in the increase of new coronavirus infections. This is an interesting finding, which follows yesterday's increase in those infected in Britain by 7,108 cases, which is the third-highest increase since the beginning of the pandemic with the autumn months not yet fully started. However, Imperial College London has found that the reproduction number (R) dropped from 1.7 to 1.1. This suggests that new infections are starting to decline, but a value above 1 also means that new infections may still increase.

 

Not unlike Britain, other European countries have begun to introduce old new restrictions to prevent the spread of the virus. Italy and Germany are currently among the few countries where the increase in new diseases has not been so dramatic, yet Germany has tightened regional outbreaks to be sure. For a more accurate estimate of whether the increase is really behind us, we will have to wait a few more weeks to see how the existing restrictions have worked. However, the decline in the number R should be an indicator of a brighter tomorrows. In the Czech Republic, the number R decreased from 1.5 to 1.1 in 2 weeks.

 

Chart: Development of the number R in Czechia (Source: seznamzpravy.cz

 

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