RLAM multi-asset manager Trevor Greetham says the outlook for sterling sits within a 30 per cent range over the next two to three years due to Brexit uncertainty.
The outlook for the currency is dependant on closed-door discussions between politicians, he says, and the level of exchange rate uncertainty is rare.
Sterling reacted unpredictably to the Bank of England’s decision to raise rates to 0.5 per cent at this week’s meeting falling 1 per cent against the dollar on the dovish tone of the MPC statement.
The FTSE 100 rallied as weaker sterling supports internationally-focussed earnings in the large-cap index.
“UK investors with a low appetite for risk should ensure the bulk of their investments are sterling denominated,” says Greetham. “Doing this should help to remove one particular source of uncertainty from the equation.”
The head of multi asset says sterling could fall 10 to 15 per cent further a “disruptive” no deal outcome from Brexit negotiations, which would also stymie monetary tightening.
“On the other hand, if permanent single market membership becomes likely, or if we see a reversal of the decision to leave the EU, the Bank of England would be comfortable raising rates further,” says the Royal London Asset Management manager.
“In this case, sterling would probably rise 10 to 15 per cent.”
Greetham reckons the Bank of England is in “wait and see” mode after its decision to raise rates to 0.5 per cent on Thursday.
Hargreaves Lansdown senior analyst Laith Khalaf says the reaction of markets to the MPC decision demonstrates why investing based macro-economic events like an interest rate rise should be avoided.
“In theory an interest rate rise should be positive for the pound and the banking sector, and negative for gilts and the FTSE 100,” Khalaf notes. “[Yesterday] the pound fell, as did Lloyds and RBS shares, while gilts and the broader Footsie rallied, turning the investment textbook on its head.”
The reversal of policy from the post-Brexit vote cut has been described as mistimed, odd and difficult to justify by investors concerned about political uncertainty clouding the economic outlook.