Now that the second quarter of 2014 has come to a close, it’s about time we review how hotshot financial institutions were able to predict price action. Were their forecasts spot on or totally off?
Not even close! Most of the Q2 forex forecasts were off by nearly a couple hundred pips, as almost everyone and his momma were strongly bullish on the dollar and bearish on the yen back then.
Recall that risk aversion was still in play around the time these estimates were published and that markets were pricing in potential easing from the BOJ after the sales tax hike. Back in April, the FOMC was notably more hawkish with their economic assessment and outlook compared to their recent cautious policy stance. That was around the time Yellen said that the Fed might start hiking rates “something on the order of around six months” after asset purchases end!
Other fundamental factors that shook up the forex market in the past few months include the ECB rate cut extravaganza and the BOE’s rate hike expectations for 2014, which explains the huge 615-pip difference between the median forecast for GBP/USD and the Q2 2014 closing price for the pair. Take note though that while euro weakness was mostly responsible for the lower closing prices of EUR/JPY and EUR/GBP, dollar weakness played a greater role in pushing EUR/USD higher than projected.
As with the Q1 2014 Big Banks’ Forex Forecasts, this review of price estimates from top financial firms suggests that even those with all the resources and analytical tools cannot accurately predict how currency pairs will trade three months from now. Nothing is ever set in stone in the market and it is always important to be aware of the changes in sentiment or biases. Even more important in actual trading is the ability to adjust to these changes. Stay flexible, fellas!