Forecasting the US Dollar/Euro Exchange Rate

I analyze the economic value of combining three types of information to forecast the US dollar/euro exchange rate: macroeconomic fundamentals as used in structural exchange rate models, information from historical daily prices as used in technical trading rules, and intraday transactional data as used in order flow models. The out-of-sample period starts in January 2005 and ends March 2010. I find that fundamental Taylor rules yield a significant 5.38% annual return out-of-sample. Technical channel rules result in an annual out-of-sample return of 3.52%, but the return is insignificant at the 5% level. Order flow results, based on intraday CME futures data and the popular tick test to sign trades, disappoint with an annual return of minus 2.82% with a t-value of -0.62. As a consequence, combining Taylor rules with channel rules, order flow, or both does not improve the economic performance.