Correlation measures how closely the price movements of two instruments are related, on a scale from +1 (perfectly correlated — they move together) to -1 (perfectly inversely correlated — they move opposite). A correlation near 0 means no consistent relationship. Traders use correlation to diversify positions, avoid doubling risk on correlated pairs, and identify hedging opportunities.
EUR/USD and GBP/USD are positively correlated (typically +0.80 to +0.90). If you are long on both, you are essentially doubling your USD short exposure. Conversely, EUR/USD and USD/CHF are negatively correlated — when one rises, the other tends to fall.
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