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 or 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 the S&P 500.
The S&P 500 and EUR/USD has generally displayed an inverse correlation. This is not unexpected as both financial assets share a common fundamental which is the US economy.
Looking at the EUR/USD and S&P 500 chart above for the past year, we observe a fairly inversely correlated relationship. The EUR/USD currency pair is on a long term bearish trend while the S&P 500 is on a long term bullish trend. This suggests that US Dollars are in demand as a result of investments flowing into the American economy.
The last section beginning 1 Jan 20 is of particular interest. As a result of global developments, for example the COVID 19 crisis, the inverse correlation stands out with the sharp spikes and dips that happened inversely. The S&P 500 is rather resilient despite the global risk aversion which many markets witnessed. This suggests that as investors withdraw from Asia, the US economy remains the choice as a “safe haven”.
The Bottom Line
The EUR/USD and S&P 500 maintained a inversely correlated relationship despite recent global developments. Forex traders should make use of this correlation to complement their trading plans. Having said so, nothing in forex or in fact the markets in general can be determined with an accuracy of 100%. It is prudent to always monitor both assets closely to determine if the inverse correlation is still valid.