Exchange rate forecasts and expected fundamentals

• Good exchange rate forecasts are related to good interest rate forecasts.
• This relationship is robust to individual fixed effects and further controls.
• The relationship is stronger when the impact from fundamentals is more obvious.
• This occurs, e.g., when exchange rates substantially deviate from their PPP values.
• A commonly-shared exchange rate model works if interest rate forecasts are right.

Using a large panel of individual professionals' forecasts, this paper demonstrates that good exchange rate forecasts are related to a proper understanding of fundamentals, specifically good interest rate forecasts. This relationship is robust to individual fixed effects and further controls. Reassuringly, the relationship is stronger during phases when the impact from fundamentals is more obvious, e.g., when exchange rates substantially deviate from their PPP values. Finally, forecasters largely agree that an interest rate increase relates to a currency appreciation, but only good forecasters get expected interest rates right.