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Correlation Report : EUR/USD – S&P 500 Dec 10

Good day forex trading koalas.

We last visited this correlation in Sep 10. Back then, we noted that there was a loose correlation between these two financial instruments. Due to the different characteristics of these two financial instruments, we can see that the EUR/USD usually moves in a more extreme way versus the subtle nature of the equity index S&P 500.

Looking at the comparison of the EURUSD and S&P500 above, we can see two obvious phrases above.

  • Right up to mid November, we see a mainly correlating relationship between the two pairs. When the sentiments were good, risk appetite probably brought demand to higher yielding financial instruments such as the Euro currency and the equities. Hence we see both financial instruments increasing in value. When the Euro Zone deficit crisis started to affect the markets, we can see that both the EUR/USD and the S&P 500 started to drop right about early November. This stayed true to the risk aversion concept. When there is excessive risk in the markets, investors usually withdraw from higher yielding / risk assets such as the Euro currency and equities in favor for traditional assets such as the US Dollar and Gold.
  • After mid November however we can see an apparent new behavior of the markets. The S&P 500 continued to increase in value while the EURUSD continued to dip in favor of the US Dollar. In forex trading it is crucial that we seek an ongoing intimate understanding of the sentiments of the markets. It was widely believed that the Euro Zone appeared to be struggling with it’s effort to contain and eliminate the deficit crisis. The diverse nature of it’s member states probably serves to complicate possible solutions. On the other hand, the US is a single country and policies which are apparently good for the economy are pushed out to the market relatively faster. The willingness of the US Fed to implement Quantitative Easing and various other fixes are welcomed by investors. Therefore the S&P 500 ( which is an US equity index ) continues to soar while the EUR/USD dips due to less demand for the troubled Euro.

As of now the relationship between the EURUSD and the S&P 500 seems to be inversely correlated. Having said so we know that the conditions of the markets are always changing and hence careful attention must be given.

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