Why would technical analysis to forecast future exchange rates be ineffective if all parity conditions prevailed?

Question

Quizplus · Accepted Answer

When all parity conditions (such as interest rate parity and purchasing power parity) prevail in the market, the best predictor of future exchange rates would be the forward rate. Technical analysis would not be effective in predicting future rates in such a scenario as it relies on past price movements and trends, which may not hold true under parity conditions. The current spot rates may not be a reliable predictor in such a scenario as they may already reflect the prevailing parity conditions. Volatility of future exchange rates may provide some indication of uncertainty but may not necessarily lead to accurate predictions. The unbiased predictor would still exist, but it would be based on the forward rate under parity conditions.

Why Would Technical Analysis to Forecast Future Exchange Rates Be