Nomura’s Dominic Bunning and colleagues note that while the Dollar bull case remains supported by strong US data, higher Fed rate expectations and robust US equities, historical patterns around US data surprises point to downside risks for USD over the next few months. They highlight stretched positioning, potential shifts in US employment data, Fed communication and AI-driven tech sentiment as key catalysts.

US exceptionalism narrative looks vulnerable

"The USD bull case has become more prominent in recent weeks. Strong US data and a repricing of Fed rate hikes in the year ahead support USD gains. US equities have been outperforming for most of the last few months (albeit with a recent pull back), which has aligned with a resumption of inflows into US capital markets."

"This widening suggests the bar to further upside surprises is rising, and there is a growing risk we are close to peak USD optimism."

"We looked at the full history of US Economic Surprise Index data and considered occasions in which the index crossed up over the 60 level – where it has been hovering for the last week or so. We found 41 examples. We then examined USD returns versus all G10 currencies and as an equal-weighted index over the subsequent 1 week, 2 weeks, 1 month and 3 months."

"When we raise the threshold on the US Surprise Index to a slightly higher hurdle level of 70, we find the returns become much more consistently negative across all performance windows. This suggests we are on the cusp of tipping over into increasing downside risks for USD."

"Most importantly for us, the recent strength in US data surprises has historically been more closely linked to future USD weakness than to strength, and long USD positioning / short positioning for other currencies is moving into territory that could start to look stretched."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)