The foreign exchange market, commonly known as the forex market, is the largest and most liquid financial market in the world. It is a decentralized market where currencies are traded 24 hours a day, five days a week. In this market, currencies are always traded in pairs, with one currency being exchanged for another. Each currency pair has its own unique characteristics, and some pairs are known to trail each other closely. In this article, we will explore what two forex pairs trail each other.
Before diving into the two forex pairs that trail each other, it is essential to understand the concept of currency correlation. Correlation is a statistical measure of how two assets move in relation to each other. In forex trading, it refers to how two currency pairs move together or in opposite directions. A positive correlation means that two currency pairs move in the same direction, while a negative correlation means that they move in opposite directions.
The two forex pairs that trail each other are the EUR/USD and USD/CHF. These two currency pairs have a strong negative correlation, meaning that when one pair rises, the other pair falls. This correlation exists because the Swiss franc (CHF) is considered a safe-haven currency, while the euro (EUR) is not. In times of uncertainty or market volatility, investors tend to flock to safe-haven currencies like the Swiss franc, which causes its value to rise. On the other hand, the euro tends to weaken during times of uncertainty or market volatility.
The EUR/USD is the most widely traded currency pair in the forex market, and it represents the value of the euro in relation to the US dollar. The US dollar is the world’s reserve currency, and it is used in most international transactions. The euro, on the other hand, is the second most traded currency in the world and is the official currency of 19 European Union countries.
The USD/CHF currency pair represents the value of the US dollar in relation to the Swiss franc. Switzerland is a small, wealthy country known for its stable economy and political neutrality. The Swiss franc is widely considered a safe-haven currency because of Switzerland’s political and economic stability.
The negative correlation between the EUR/USD and USD/CHF is a result of their inverse relationship with the US dollar. When the US dollar strengthens, the EUR/USD pair tends to fall, while the USD/CHF pair tends to rise. This is because a stronger US dollar makes the euro less attractive to investors, while it makes the Swiss franc more attractive.
Another factor that affects the correlation between these two currency pairs is the European Central Bank (ECB) and the Swiss National Bank (SNB). The ECB is responsible for setting monetary policy for the eurozone, while the SNB is responsible for setting monetary policy for Switzerland. The policies of these central banks can affect the value of their respective currencies, which in turn affects the correlation between the EUR/USD and USD/CHF pairs.
In conclusion, the EUR/USD and USD/CHF are two forex pairs that trail each other closely. These two currency pairs have a strong negative correlation, meaning that when one pair rises, the other pair falls. This correlation exists because of the inverse relationship that these two pairs have with the US dollar and the safe-haven status of the Swiss franc. Understanding the correlation between currency pairs is essential for forex traders as it can help them make informed trading decisions and manage their risk effectively.
