The Role of Technical Indicators in Exchange Rate Forecasting

Abstract

Forecasting exchange rates is a subject of wide interest to both academics and practitioners. We aim at contributing to this vivid research area by highlighting the role of both technical indicators and macroeconomic predictors in forecasting exchange rates. Employing monthly data ranging from January 1974 to December 2014 for six widely traded currencies, we show that both types of predictors provide valuable information about future currency movements. To efficiently summarise the information content in candidate predictors, we extract the principal components of each group of predictors. Our findings suggest that combining information from both technical indicators and macroeconomic variables significantly improves and stabilises exchange rate forecasts versus using either type of information alone.

Keywords: Exchange Rate Predictability, Principal Components, Forecast Combination, Technical Indicators, Macroeconomic Fundamentals

JEL Classification: C53, C58, F31, G17