Trading News for Beginners – What is Currency Correlation?
In this article, you’ll learn a broad overview of:
- Positively-correlated major currency pairs
- Negatively-correlated major currency pairs
- Why currency pairs are negatively or positively correlated
- How fundamental and technical analysis work together
Currency correlation is statistical technical analysis that can give traders insights into how currency pairs move with or against each other.
Positive correlations are seen when currency pairs move in the same direction. They range from 0 to 1 and are described as strongly-correlated or weakly-correlated, depending on where they fall along the range.
Negative correlations are seen when currency pairs move in opposite directions. They range from -1 to 0. Negatively-correlated currency pairs are described as strong or weak, depending on where they fall along the range.
The full range of currency correlations is minus 1 to plus 1 and they can be expressed as a coefficient -0.90 or a percentage -90%. A note of caution: there can be divergence from an average correlation in the case of certain market conditions such as unusual levels of volatility.
Why are currency pairs negatively or positively correlated?
In general, there are different reasons for negative and positive currency correlations, including:
- Economic ties and currency flows between countries
- Their relationship to the USD, the most-traded currency in the world
- Monetary policy divergence between national currencies
- The quote currency of one pair is the base currency of the other currency pair
Meeting points of technical and fundamental analysis
There are overlaps between technical analysis using statistics and charts, and fundamental analysis using news and sentiment. Since market-moving trading news events often trigger currency pair movements, the connections between fundamental analysis and technical analysis are worth a closer look.
Let’s begin with an explanation of correlated versus non-correlated currency pairs and then see a scenario of how they might react during a market-moving trading news event.
Example of positively correlated currency pair
The EURUSD and GBPUSD are typically considered to be positively correlated currency pairs, connected by their relationship with the USD and the trade and monetary policy relationships between the EU, UK and US.
Example of negatively correlated currency pair
The EURUSD and USDCHF are typically negatively correlated, notice that the quote price of the first currency pair is the base price of the second currency pair.
The key point in this example is the strength of the USD. In a scenario when the USD is stronger against the EUR, the EURUSD pair would decline. Conversely, when the USD rises against the CHF, the USDCHF pair would rise, leading to a negative correlation between the EURUSD and USDCHF.
Example of market-moving trading news
Taking another look at the example of positive correlation between the EURUSD and GBPUSD, let’s place it in a trading news scenario. The Federal Reserve decides to raise interest rates (trading news) and the USD strengthens against the EUR and GBP (market reaction). As a result, the EURUSD and GBPUSD decline, showing positive correlation.
Take the example of negative correlation between the EURUSD and USDCHF using the same trading news scenario. The Federal Reserve’s interest rate decision leads to a stronger USD, meaning that the EURUSD declines and the USDCHF rises, showing negative correlation.
The degree of correlation between currency pairs varies, it’s not fixed, so before using this concept in your trading it’s best practice to check the current correlation status.
To conclude our overview of currency correlations, relationships between currency pairs are in constant flux and can be used to inform trading decisions once you have enough experience. For a more in-depth understanding of this topic and how it’s used in trading, see additional resources from Admiral Markets.
More resources
Forex Currency Strength Meter - Technical Indicator for Traders (admiralmarkets.com)
Webinar: Currency Correlations for Beginners | Trading Spotlight
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
