Why Professional Forecasts Are Weaker Than They Sound

[Fairman]

Why Professional Forecasts Are Weaker Than They Sound

Currency forecasts arrive with confident numbers: EUR/USD at 1.15 in twelve months. Studies of their accuracy suggest caution.

Research on exchange rate forecasting has a long history. A famous finding, from work in the early 1980s by Meese and Rogoff, showed that economic models struggled to beat a simple random walk, which assumes the best forecast is today's rate, over short horizons. Later studies found some predictability at longer horizons, but the results are mixed and unstable.

Surveys of professional forecasters show wide errors. Forecasts tend to extrapolate recent trends, and they often miss turning points. Analysts also tend to cluster around consensus, since being wrong with the crowd is less costly than being wrong alone.

Why is it so hard? Exchange rates depend on many factors that interact and change: interest rates, growth, politics, flows, and sentiment. Expectations are already reflected in prices, so only surprises move them, and surprises are by definition unpredictable.

This does not mean analysis is useless. Understanding drivers helps frame scenarios and risks. But precise targets deserve skepticism.

A better use is to think in terms of ranges and probabilities, and to focus on risk management rather than prediction.

Test it yourself: record forecasts you read and compare them with outcomes after the stated horizon.

Practical step: collect three published twelve-month forecasts for a pair, and check them against actual prices when the dates arrive.

[Fairman]

Keeping a list of forecasts and checking them later is great practice. After a year you'll treat confident price targets very differently. A simple spreadsheet works: date, source, pair, target, horizon, and the actual rate when the horizon arrives. Include your own forecasts too. Most people find that a large share of targets miss badly, and that the forecasts made after a big move tend to assume it continues. It doesn't mean analysts are useless, many of them understand the drivers far better than retail traders. It just shows that exchange rates are very hard to predict, so trading plans built on a single target are fragile.

[Fairman]

Ranges and scenarios are more honest than a single number. If an analyst can't tell you what would make them wrong, the target isn't much use. A good note says something like base case EURUSD drifts higher if the Fed cuts twice and the ECB holds, but if US inflation stays sticky, the pair probably falls instead. That gives you conditions to watch, and those conditions are actually useful for your trading. You can check after each CPI release or central bank decision which scenario is playing out. A single target of 1.15 by year end doesn't tell you anything to watch along the way, so you can't tell when it's failing.