Currency pairs correlation measures the statistical relationship between two currency pairs' price movements. Understanding correlation helps traders make informed decisions. Types of Correlation 1. Positive Correlation: Currency pairs move in the same direction (e.g., EUR/GBP and GBP/USD). 2. Negative Correlation: Currency pairs move in opposite directions (e.g., EUR/USD and USD/JPY). 3. Neutral Correlation: No significant relationship between currency pairs. Factors Influencing Correlation 1. Economic indicators (GDP, inflation, interest rates) 2. Central bank policies 3. Geopolitical events 4. Market sentiment 5. Trading volume Major Currency Pairs Correlations 1. EUR/USD and USD/JPY: Negative correlation (70-80%) 2. EUR/GBP and GBP/USD: Positive correlation (50-60%) 3. AUD/USD and NZD/USD: Positive correlation (70-80%) 4. USD/CAD and crude oil: Positive correlation (50-60%) Currency Pair Groups 1. Safe-haven currencies (USD, JPY, CHF) 2. Commodity currencies (AUD, NZD, CAD) 3. European currencies (EUR, GBP) Correlation Trading Strategies 1. Hedging: Reduce risk by trading correlated pairs. 2. Pair trading: Exploit price discrepancies between correlated pairs. 3. Statistical arbitrage: Identify mispricings in correlated markets. Analyzing Correlation Tools 1. Correlation coefficient (Pearson's r) 2. Heat maps 3. Scatter plots 4. Currency correlation matrices Limitations and Risks 1. Correlation does not imply causation. 2. Correlations can change over time. 3. Over-reliance on correlation analysis. Best Practices 1. Monitor correlation changes. 2. Combine correlation analysis with fundamental and technical analysis. 3. Adjust trading strategies according to market conditions. Key Takeaways 1. Correlation analysis helps traders understand currency pair relationships. 2. Economic indicators, central bank policies, and market sentiment influence correlation. 3. Effective trading strategies utilize correlation analysis.