Sterling back up against No-deal Brexit! Japanese yen to succeed Yoshihide Suga! Is euro/DOLLAR still undervalued?

Sterling recovered against the dollar in early Asian trading on Monday as domestic opposition to Britain’s attempt to overturn the Brexit deal awaited Japan’s ruling party to choose a successor to Prime Minister Shinzo Abe.

Sterling rose 0.2 percent to $1.2817 on Monday. The pound came under pressure last week amid fears that the UK would end its post-Brexit transition period without any trade deal. London’s explicit admission that it may violate international law by flouting certain provisions of the EU’s “Brexit treaty” has drawn strong criticism from EU officials. Tony Blair and John Major, former British prime ministers, said on Sunday that Britain must abandon the “shocking” plan.

The dollar traded at 106.113 yen, where it has held steady for the past few weeks. Yoshihide Suga, Japan’s chief cabinet secretary, will take over as leader of the ruling party on Monday and replace Shinzo Abe, Japan’s longest-serving leader, as prime minister on Wednesday. Because Mr. Suga has long been a loyal aide to Mr. Abe and has vowed to continue his policies, few market participants expect fundamental changes.

“The focus is on the composition of his cabinet and whether he will call an early election,” said Minori Uchida, chief foreign exchange strategist at MUFG Bank. “He said he would continue with Abenomics, but there are questions about how much progress he can make.”

The euro held firm against the dollar at $1.18458 after three days of gains. The euro was supported after the European Central Bank showed no clear signs of reining in its rise. Speaking on Sunday, Christine Lagarde, the European Central Bank President, said the bank would assess the coming data “cautiously”, including the strength of the euro. Luis DE Guindos, ECB vice President, also said the central bank does not target the euro exchange rate in its policies, but it is an important variable that is monitored by the ECB in assessing its impact on price stability.

And while the euro is up more than 5% against the dollar this year, analysts at Goldman Sachs say it is still undervalued. “With a long-term fair value of 1.30 euro/dollar, the euro is well positioned to participate in the overall dollar weakness,” said Zach Pandl, global co-head of fx strategy at the bank. He added: “The domestic market in the euro area will benefit from the full recovery in the global economy. Goldman’s 12-month target is 1.25. With the approval of the coronavirus vaccine and the possible victory of Joe Biden in the US presidential election, that goal may be achieved sooner than expected.”

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