Why does GBPUSD follow EURUSD so closely?

JTrader · Feb 8, 2007

Hi

on an intraday basis, GBPUSD mirrors the price action of EURUSD for a lot of the time.

When EURUSD begins to rise, GBPUSD follows. When EURUSD pauses, so does GBPUSD, etc. etc.

EURUSD & GBPUSD do go out of sync with each other. And while they do move in sync a lot of the time, within this synchronisation, EURUSD may be steadily trending up, while GBPUSD may steadily be heading down, if you look at them on the same timeframe of chart.

However, when EURUSD breaks out in either direction, GBPUSD seems to follow suit.

Why does this happen?

It surely cannot be coincidence.

I struggle to believe that this is due to human activity either. With the thought process of human traders being along the lines of - EURUSD is heading up, so we better go long on GBPUSD.

On another thread it was suggested that banks use computers rather than people to trade spot forex. All this makes me think that a computer program/algothrim can be the only obvious reason as to why GBPUSD follows so closely.

This doesn't fill me with any confidence, as it effectively means I would be trying to second guess a computer program!

Many thanks.

Jack o'Clubs · Feb 8, 2007

The fact that half of both pairs is the $ has more than a little to do with it, particularly in pm moves. If something impacting the $ occurs, and there's no reason for EURGBP to fundamentally change then they will obviously move together.

pssonice · Feb 8, 2007

your thesis is completely wrong, look at the last hour right now !

the correlation between EURUSD and GBPUSD with a periode of 1 min during last 2 hours is -0.6

pssonice · Feb 8, 2007

no, sorry, this was a joke, I ve no idea

.

Depth Trade · Feb 8, 2007

JTrader said:
Hi

on an intraday basis, GBPUSD mirrors the price action of EURUSD for a lot of the time.

When EURUSD begins to rise, GBPUSD follows. When EURUSD pauses, so does GBPUSD, etc. etc.

EURUSD & GBPUSD do go out of sync with each other. And while they do move in sync a lot of the time, within this synchronisation, EURUSD may be steadily trending up, while GBPUSD may steadily be heading down, if you look at them on the same timeframe of chart.

However, when EURUSD breaks out in either direction, GBPUSD seems to follow suit.

Why does this happen?

It surely cannot be coincidence.

I struggle to believe that this is due to human activity either. With the thought process of human traders being along the lines of - EURUSD is heading up, so we better go long on GBPUSD.

On another thread it was suggested that banks use computers rather than people to trade spot forex. All this makes me think that a computer program/algothrim can be the only obvious reason as to why GBPUSD follows so closely.

This doesn't fill me with any confidence, as it effectively means I would be trying to second guess a computer program!

Many thanks.

Either way one picks for direction on Cable they would be more than likely wrong. Going long or short Cable puts your entrance into a premium price paid on the position. For this reason the next best choice for direction is to follow Eur/usd.
I believe this is because Eur/usd has highest volume and is already thought of as correlating with Cable, so cable will follow Eur/usd if no other fundamentals are directing it.

DT

JTrader · Feb 8, 2007

Thanks

I think what i am trying to get at is whether this "correlation" is due to human activity of automated algothrims.

Man v's machine etc. etc.
The way GBPUSD pauses when EURUSD pauses, and GBP speeds up when EUR speeds up, and GBP reverses when EUR reverses - a high % of the time - seems to much of a coincidence to me, for this to be the result of human activity.
Perhaps the banks have complex systems whereby their systems GBPUSD trade activity will be closely based on EURUSD activity?

Jack o'Clubs · Feb 8, 2007

JTrader said:
Thanks

I think what i am trying to get at is whether this "correlation" is due to human activity of automated algothrims.

Man v's machine etc. etc.
The way GBPUSD pauses when EURUSD pauses, and GBP speeds up when EUR speeds up, and GBP reverses when EUR reverses - a high % of the time - seems to much of a coincidence to me, for this to be the result of human activity.
Perhaps the banks have complex systems whereby their systems GBPUSD trade activity will be closely based on EURUSD activity?

Yes - they would certainly have an algorithm that triangulates between, say, GBP, EUR and USD to make sure any arbitrage opportunities are mopped up.

jacinto · Feb 8, 2007

JTrader said:
Hi

on an intraday basis, GBPUSD mirrors the price action of EURUSD for a lot of the time.

When EURUSD begins to rise, GBPUSD follows. When EURUSD pauses, so does GBPUSD, etc. etc.

EURUSD & GBPUSD do go out of sync with each other. And while they do move in sync a lot of the time, within this synchronisation, EURUSD may be steadily trending up, while GBPUSD may steadily be heading down, if you look at them on the same timeframe of chart.

However, when EURUSD breaks out in either direction, GBPUSD seems to follow suit.

Why does this happen?

It surely cannot be coincidence.

I struggle to believe that this is due to human activity either. With the thought process of human traders being along the lines of - EURUSD is heading up, so we better go long on GBPUSD.

On another thread it was suggested that banks use computers rather than people to trade spot forex. All this makes me think that a computer program/algothrim can be the only obvious reason as to why GBPUSD follows so closely.

This doesn't fill me with any confidence, as it effectively means I would be trying to second guess a computer program!

Many thanks.

I guess the answer is rather complex, and I will certainly get it wrong. Instead, I will address other questions that will probably confuse you more, but when addressed probably will help see what is going on.

1) How to know if a Cable move is a Sterling move only?
2) How to know if a EURUSD move is either a Euro move only
3) How to know if there is a USD move only

I would start seeing the other crosses. They may give a good idea of what is going on.
as an example:
Look at a EURJPG, and that is a clear EUR move.
Look at USD index, and look for its moves. Then, for example, look at the % of the mix of the index. As far as I remember, EURUSD took a large share of the mix. So, at times, EURUSD may give you a good idea of a USD move only, or not.

just a couple of thoughts. not aiming at answering your question, and certainly not at confusing you, but at opening a view at other ways of trying to explain it

j

Atilla · Feb 8, 2007

JTrader said:
Thanks

I think what i am trying to get at is whether this "correlation" is due to human activity of automated algothrims.

Man v's machine etc. etc.
The way GBPUSD pauses when EURUSD pauses, and GBP speeds up when EUR speeds up, and GBP reverses when EUR reverses - a high % of the time - seems to much of a coincidence to me, for this to be the result of human activity.
Perhaps the banks have complex systems whereby their systems GBPUSD trade activity will be closely based on EURUSD activity?

Hi JTrader,

I think you can answer this your self by thinking about it.

1. What are exchange rates and what do they tell you?
2. What determines exchange rates?
- Balance of Payments
- Interest rates - Inflation
3. Apply 2 to each exchange rate EUR GBP & USD

Basically, why not look at direct relationships rather than secondary ones.

In the news today "ECB President Jean-Claude Trichet said "strong vigilance" was needed to avoid "risks to price stability". Economists said that Mr Trichet's comments indicated that eurozone rates were likely to rise to 3.75% in March.

Bush has asked for another $200+ bn on top of the $500bn already spent from the senate. Not to mention 7% defecits in the Budget with more tax cuts for the oil industry on the way.

B of E recently raised interest rates and is manipulating the CPI index by removing fuel entries to bring inflation down from 3.5% to 1.2% because economy is heating up.

I know we are all Technical Analysts but what does all this FA tell you about the Euro the GBP and the USD?

So coming back to your question

"I think what i am trying to get at is whether this "correlation" is due to human activity of automated algothrims.

Automated algothrims don't have human activity. Do you mean programmed system trading by automated?

Phil Mibbutz · Feb 8, 2007

If GBP and EUR were always in synch, fine. The really clever bit would be to explain why they sometimes do completely their own thing, as today.

Atilla · Feb 8, 2007

Phil Mibbutz said:
If GBP and EUR were always in synch, fine. The really clever bit would be to explain why they sometimes do completely their own thing, as today.

That's easy...

UK & Europe are two different economic institutions with two different currencies with two different sets of varialbles that determine exchange rates.

It would be wrong to expect them to move in synch.

They may be related to economic growth or activity but once again, look for direct relationships rather than long winded indirect ones.

Another wild goose chase if you ask me.

RU12NVME51 · Feb 9, 2007

yeah, look at the cable at 11:45 am on the Feb 8th, damn, what the hell happened there? Any explanation for that?

Atilla · Feb 9, 2007

RU12NVME51 said:
yeah, look at the cable at 11:45 am on the Feb 8th, damn, what the hell happened there? Any explanation for that?

Is this your explanation / justification for the link between GBPUSD & EURUSD then?

Get your ruler and work it out for your self and then let us know what you think!

RU12NVME51 · Feb 9, 2007

Atilla said:
Is this your explanation / justification for the link between GBPUSD & EURUSD then?

Get your ruler and work it out for your self and then let us know what you think!

The two pairs reacted nothing alike.. that is all I'm saying.. I'm a newbie and I went searching for the reason behind the freefall....

jgerousis · Feb 10, 2007

JTrader said:
Hi

on an intraday basis, GBPUSD mirrors the price action of EURUSD for a lot of the time.

When EURUSD begins to rise, GBPUSD follows. When EURUSD pauses, so does GBPUSD, etc. etc.

EURUSD & GBPUSD do go out of sync with each other. And while they do move in sync a lot of the time, within this synchronisation, EURUSD may be steadily trending up, while GBPUSD may steadily be heading down, if you look at them on the same timeframe of chart.

However, when EURUSD breaks out in either direction, GBPUSD seems to follow suit.

Why does this happen?

It surely cannot be coincidence.

I struggle to believe that this is due to human activity either. With the thought process of human traders being along the lines of - EURUSD is heading up, so we better go long on GBPUSD.

On another thread it was suggested that banks use computers rather than people to trade spot forex. All this makes me think that a computer program/algothrim can be the only obvious reason as to why GBPUSD follows so closely.

This doesn't fill me with any confidence, as it effectively means I would be trying to second guess a computer program!

Many thanks.

Not always. If you look in february 8th you will see that the GBP slipped down, while the EUR went up!!!!

This made the EURGBP pair go up a lot.

But in many times you are right. The reason is that we look at the two currencies against a common currency, the USD.

UM_manager · Feb 12, 2007

Atilla said:
What determines exchange rates?
- Balance of Payments
- Interest rates - Inflation

Basically, why not look at direct relationships rather than secondary ones.

Agree with Atilla, balance of payments and interest rates do determine exchange rates and correlations between currency pairs. Remember, for example, when the rates in US, Europe and Japan were low, there were practically no difference what pair to trade (EURUSD or USDJPY) - they were highly (un)correlated. And now interest rate differential shifts even the strongest historical correlation between USDCHF and EURUSD. Secondary relationships give us the ability to quantitatively estimate these phenomena. Play with this information for better understanding.

jgerousis · Feb 12, 2007

The GBP has been acting very strange lately. Up Down.
The Euro has been make nice trends.

jacinto · Feb 12, 2007

jgerousis said:
The GBP has been acting very strange lately. Up Down.
The Euro has been make nice trends.

can you be so kind so as to explain exactly where are the trends you say about the EURO. It is in a 150 ish pip range for the last 5 weeks

RU12NVME51 · Feb 12, 2007

This is an awesome thread. I clicked on a few links on here and then links from that link and so forth and I one point I noticed that I had read 7 consecutive hours worth of information!

Yeah, I have noticed that the EURO has been doing fairly well as of late.

Sang Froid · Mar 22, 2010

I was also wondering if this happens in any other market say... does the ftse 100 mirror the ftse 250 or the dax etc.. or is it only a phenomenon know to FX?

Why does GBPUSD follow EURUSD so closely?

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