Gold has recently been of much interest to many with it’s gain in value. As one of the important insights that we use to enable our understanding of the market sentiment, it is time to review Gold’s correlation with the EUR/USD.
Correlation is a measure of how two financial assets move in relationship with each other. It ranges from being a 100% positive correlation, which means both financial assets move in unison to a 100% negative correlation also known as an inverse correlation which means both financial assets move in exact opposites.
In forex, we can seek out correlations between currency pairs and other financial assets to gain insights into possible undertones.
The EUR/USD and Gold is generally not correlated at the moment. This is not unexpected as both financial assets are experiencing different economical / sentimental situations.
Due to the COVID-19 pandemic and the various geo political tensions, apprehension and risk aversion persist. Gold is usually sought after as a “safe haven” during uncertain times and this is evident in the chart above as it’s value climbs to new highs. However, the case is different for the EUR/USD as both the US and the Euro Zone are facing immerse challenges as a result of the pandemic. As the market reacts to new developments on both sides of the Atlantic, sentiment shift resulting in price action. This translates to increased volatility which chips away the correlation between EUR/USD and Gold. Prior to this, we can see some correlation in the first two sectors of the analysis that as Gold climbs over time, the EUR/USD drops.
Having said so, there are still times when both assets correlate momentarily. This may be useful in terms of our understanding of the forex market sentiment. We can see this distinct relationship circled in the last sector of our chart analysis. Both the EUR/USD and Gold dipped sharply due to a general market shock that occurred across assets.
The Bottom Line
While the EUR/USD and Gold is no longer having the correlation seen in the first two sectors of the analysis, both assets may still experience correlation momentarily due to specific market events. This can be useful to our forex trade planning. Being familiar with the underlying currents of the markets may lead to a better informed choice of forex execution. Nothing in forex or in fact the markets in general can be determined with an accuracy of 100%. Hence it is prudent to always monitor both assets closely to determine if there is any useful insight.
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