The dismal art of forecasting the currency market
The usual rules for making long-range FX forecasts are more or less in abeyance when it comes to the pound
Currency strategists can be divided even when they agree. Forecasts for where the pound will be trading against the dollar in 12 months’ time ranged from $1.05 to $1.47 in a Reuters poll published on Oct 6. Even after a flash crash on Oct. 7, it’s fair to say that most pound-watchers expect it to fall further over the coming months. A spat between UK retailer Tesco and supplier Unilever on who takes the hit from a weaker currency suggests businesses too are starting to prepare for sterling to be lower for longer. Clever economic models sometimes underpin such predictions. But even the most complex ones will struggle this time round. Britain’s currency is more in the thrall of politics than economics. Why is sterling so tricky to forecast? The usual rules for making long-range FX forecasts are more or less in abeyance when it comes to the pound. Economists often try to parse variables such as economic activity, inflation, trade and fiscal positions to decide where currencies will go....
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