Series: Foreign currencies – the 10 most common mistakes
#03 Asking AI whether a currency will rise or fall
How reliable are exchange rate forecasts?
Exchange rates are driven by geopolitical events, central bank decisions and the volatility they create. That makes them difficult to forecast.
- What AI can deliver (Identify patterns in data series and derive exchange rate forecasts from them)
but
- Where it reaches its limits (If the time series lacks structure, even the best AI will make forecasting errors)
These errors can only be reduced through stability in the underlying time series, not through more computing power.
Three forces without a pattern
- Geopolitics
- Central banks
- Volatility
What this means: Even the best AI cannot find patterns that are not present in the data.
What can you do?
- Rely on managing risk instead of forecasts: Systematic and aligned with financial capacity
- Scenario analyses: Model adverse exchange rate paths
- Monitor indicators: Continuously track interest rates, volatility and market stress
- Avoid losses: Base hedging on what you can bear, not on opinion
The key insight – What matters is not the forecast, but whether you can bear the adverse case.
AI recognises patterns, but only where they exist. What you can rely on is therefore not the prediction, but risk management that remains bearable even in the averse scenario.
- Where is the exchange rate heading?
- What does the adverse case cost me?
Coming next month
04/10 Not knowing the differences in volatility between currencies…