In the domain of currency exchange, forecasts or predictions can help in making wise business decisions. However, this analysis needs a lot of knowledge deep industry insights, and experience to read and assess the latest trends. It helps in lowering down the risks and maximising the returns. There are different methods for making the latest currency forecasts. Although none of them is more accurate than the other one, they can help in estimating the direction of exchange rates. Here, they are:

Using Purchasing Power Parity or PPP Method:

Most of the experts propagate this method for making currency forecasts. It is based on the theory that says similar goods should have a similar process in different countries. As per this theory, the costs should be same if transaction and shipping charges are excluded from the total pricing. These prices are calculated after taking into account the exchange rate applicable to the currency. So, forecasts based on this approach say that exchange rates can change if inflation in one country is more than another. The currency in country with high inflation should depreciate to keep the process equal.

Using Econometric Models:

In this method, factors affecting currency exchange rates should be collected and related to them using an econometric model. Typically, the factors related to economic theories are used for making this model. However, you can also add variables if they can affect the exchange rates. Some commonly used factors in an econometric model are interest rate differentials, the difference in growth rates of GDP, and income growth rate related to two specific countries. This method can take more time and understanding. But, if you build a model, it becomes easier to make the latest currency forecasts based on significant data.

Using a Time Series Model:

It is a highly technical method of making currency forecasts. You can use autoregressive moving average theory to assess the past price patterns and behaviours to make predictions for the future. You need time series-based data and a computer program to build a model and create the parameters for you.

Using Relative Economic Strength:

This method focuses on the economic growth of two countries to predict the future exchange rates. The potential for a strong economic growth environment triggers foreign investments. The investors will buy the currency of the country having this favourable environment for investments. This will enhance the demand for currency and appreciate its value. This method will focus on other factors as well for inducing investment flows. You can take an example of high interest rates that attract more buyers to invest in a country for higher returns on their investments. This leads to an increase in currency valuation as well.

These are some commonly used methods for making forecasts related to exchange rates of currencies in two countries.