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Buy Australian Dollars by selling Pound Sterling - this is the new trade recommendation by HSBC's tactical FX desk.
Strategists think the Bank of England will quicken the pace it cuts interest rates, which will soften the Pound, while the Aussie Dollar looks set to benefit from the Reserve Bank of Australia's higher-for-longer approach to interest rates.
"Sell GBP-AUD," says Daragh Maher, Head of FX Strategy for the U.S. at HSBC.
A head-to-head between the Aussie and Sterling is particularly attractive because both are exposed to global risk sentiment to similar degrees, meaning they tend to rise in the good times and fall when markets are fearful.
Indeed, this could explain why price action in the Pound to Australian Dollar exchange rate (currently at 1.95) has been relatively constrained within a tight range over the course of the past two months.
But if HSBC's trade pays off, there is some volatility ahead, potentially offering some 500 pips of profit.
"For the weak leg of our cross, we turn to GBP. On the monetary policy front, we expect the dovish momentum around the BoE to continue, aided by the downturn in headline UK inflation, and likely to be fostered further should services inflation decelerate as we expect," says Maher.
HSBC thinks UK inflation is no outlier compared to that of other comparable countries and will continue to edge lower, allowing the Bank of England to speed up the pace at which it cuts rates.
The Pound has been one of 2024's best-performing currencies owing to the Bank's caution in cutting rates, which has left the UK with the highest policy rate in the G10.
This has proven a boon for the Pound, but it also means there is more space for the central bank to cut than elsewhere in the event inflation behaves.
Above: GBP/AUD at daily intervals.
What of the Aussie Dollar?
"On the other side of the equation sits the AUD. While it is exposed to the US election result through the implications for US-China trade (notably in steel), we believe a high-for-longer narrative from the RBA should provide some offset," says Maher.
HSBC's tacticians also think AUD looks cheap relative to recent improvements in China-related sentiment.
HSBC targets a falling GBP/AUD to 1.9080 as part of a recently opened trade recommendation.