The S&P 500 has remained rather resilient despite the global pandemic crisis. As an index of the global economic power US, it is closely monitored and tracked. It is time to review the S&P 500’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 S&P 500 is having some correlation at the moment as seen in the circled region. This is likely driven by the ongoing economic climate as a result of the COVID-19 crisis.
The unprecedented actions taken by central banks to provide support has resulted in a rather quick recovery from the initial crash. While there is no certainty as to whether the worst is over, a significant portion of the market has recovered in terms of risk appetite. (There is a significant portion of the market that has hunkered down in safe haven assets such as gold but that is beyond the scope of this article’s focus.) When investors are seeking riskier assets, investments such as equities or currencies of countries with riskier opportunities usually increase in value due to demand. This is probably adding upside pressure to both the S&P 500 and the Euro currency.
While the massive amount of quantitative easing has pushed off a protracted depression for now, the resulting impact on the value of it’s currency is showing. This is especially so with the US Dollar. The increase in supply has led to a downside push on value. A number of analysts are concerned about the quantitative easing actions flooding the market with US dollars. Indeed in recent weeks, it appears that the US dollar is losing it’s value against other currencies and assets. This contributes to the rise of the EUR/USD.
The Bottom Line
If the current economic climate remains, it may be possible that the EUR/USD and S&P 500 will continue to climb. As these financial assets do not move in unison, any notable development in either may serve as an advance indication of possible change in price action. For example, if the S&P 500 starts to drop due to increased risk aversion, the Euro currency may drop soon too due to reduced demand. 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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