The Dance of the Major Currency Pairs

Major currency pairs in the Forex market have relationships with each other - correlations - which traders can observe and use to their advantage. Let's delve into this:

1. What is Currency Correlation?

Currency correlation measures how closely two currency pairs move in relation to each other. If two pairs move in the same direction, they correlate positively. If they move in opposite directions, they have a negative correlation. It's like watching two herds of deer - if one moves north and the other also moves north, they're positively correlated. If one moves north and the other moves south, they're negatively correlated.

2. Major Currency Pairs and Their Correlations

Because they all involve the US dollar, major currency pairs often have correlations. For example, the EUR/USD and GBP/USD pairs are often positively correlated, meaning they tend to move in the same direction. This is because both the Euro and the British Pound tend to move in opposite directions to the US Dollar.

On the other hand, the USD/CHF (US Dollar/Swiss Franc) and EUR/USD often have a negative correlation, meaning they usually move in opposite directions. This is because the Swiss Franc is often seen as a 'safe haven' currency, which strengthens when the US Dollar weakens.

3. Using Correlation in Trading

Understanding correlations can help traders manage their risk exposure and offer additional trading opportunities. For example, if you see that EUR/USD and GBP/USD are positively correlated and the EUR/USD makes a big move upwards, you might anticipate a similar move in the GBP/USD and can plan your trades accordingly.