HSBC points out the recent USD pullback as a sign of the challenges faced by USD bulls. The strength of the dollar—reflected in the DXY index nearly hitting 104—may be an indication that it is overheated, thereby making it vulnerable to economic data disappointments. HSBC also notes that the continuation of the USD bull run would require a sustained narrative of U.S. exceptionalism, which is increasingly priced in.

Key Points:

• Stretched USD Level: The USD DXY index, close to 104, indicates an overheating scenario, which adds vulnerability to any pullbacks.

• Data Sensitivity: The USD is especially sensitive to any data disappointments, as evidenced by the sell-off following recent economic shortfalls.

• U.S. Exceptionalism Priced In: The challenge for USD bulls is that an extension higher would need the U.S. exceptionalism narrative to be sustained, and a lot of it is already priced into the currency.

• Mixed Fortunes for G10 FX: While a high USD level doesn't necessarily predict a broad reversal, it is likely that the performances of the rest of the G10 currencies will be mixed in the coming weeks.

Implications:

For Traders and Investors:

• Short-term: USD is vulnerable to downside risks from disappointing economic data and is especially sensitive at its current stretched levels.

• Medium-term: With U.S. exceptionalism increasingly priced in, the USD needs a continuation of weaker data outside of the U.S. to maintain its bull run.

Conclusion:

The recent pullback in the USD could be a harbinger of challenges for currency bulls. The USD is at stretched levels and increasingly vulnerable to any data disappointments, making it a risky bet in the short term. A sustained bull run would require the continuation of the U.S. exceptionalism narrative, but with that largely priced in, HSBC sees mixed fortunes for the G10 currencies in the weeks ahead.