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.
It is time to review the correlation between the EUR/USD and Oil.
The EUR/USD and Oil is generally not correlated. This is not unexpected as both financial assets have faced different challenges in these months.
Having said so, there are times when both assets correlate momentarily and this may be useful in terms of our understanding of the forex market sentiments. We see this distinct relationship in the last sector of our chart analysis. Both the EUR/USD and Oil were bearish as a result of the emergence of global challenges.
The COVID-19 crisis is exerting a heavy burden on the economies of the world. Beginning in China and rippling out globally, measures taken to stop the spread of the virus such as limiting travels are impacting economic sectors such as retail and tourism. This sends a negative upstream pressure to the manufacturing industries. As production is reduced, less oil is required. Risk aversion also exerts upside pressure for “safe assets” such as the US dollar. These influences depress the value of the EUR/USD and Oil.
Regardless, the huge spike for the EUR/USD towards the end of the chart serves to remind us that the correlation between the EUR/USD and Oil is not a constant. That spike was mainly due to negative sentiment towards the drop of the US 10 year note yield.
The Bottom Line
The EUR/USD and Oil is generally not correlated except during times when both assets face similar economic challenges. This may be useful to our forex trade planning as knowing the underlying currents of the markets may lead to a better informed choice of forex execution. We know that 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.