Many economists view technical analysis as patently absurd, when used to trade in the forex markets.  Economic theory holds a currency’s exchange rate is tied to a variety of factors, including interest rates, the curren account balance, macroeconomic indicators, and political stability. However, empirical evidence lends support to the legitimacy of technical analysis. Certain currencies appear to trade within ranges, bouncing off different support levels. Stochastic indicators and moving averages are often used with great accuracy to predict the direction of a particular currency. In fact, all banks now pay as much attention to teams of technical analysts as they do economists. However, that technical analysts at different banks are often using the same strategies predicated on the same set of tools to trade currencies is causing some problems. The Asia Times reports:

And in the fun-house mirror logic of markets, the chartists can at times be correct. Sterling/dollar quotes really can approach a barrier. But this is a confidence trick: everybody knows that everybody else knows about the support points, so they place their bets accordingly.

Read More:  FX Commentary