Correlation between currency pairs
Currencies are always quoted in pairs in forex markets, one currency price against another. For example, the price of the euro is quoted against the US Dollar, the Swiss Franc against the Sterling, the Turkish lira against the Brazilian real and so on. Currency pairs ever trade dependently from others, because they are correlated. Correlation can be positive, when the pairs react in the same direction, and negative when they react the opposite.
Three of the most traded pairs in the Forex market -GBP/USD, AUD/USD, and EUR/USD are positively correlated with each other, as the counter currency is the US dollar. Therefore any change in the dollar directly impacts the pair as a whole. The NZD/USD is also positively correlated to the above mentioned major pairs.
Non-correlated pairs to these majors include USD/CHF, USD/JPY, and USD/CAD. The base currency in these pairs is the US dollar and that is the reason why they move in the opposite direction of the above-mentioned majors where the dollar is the counter currency.
If a trader were trading the Sterling against the US Dollar he will also be partly trading the Euro against the Sterling. It stands to be true then that the Sterling against the US Dollar trade must be correlated in some way to the Euro against the Sterling. Knowing which pairs are positively or negatively correlated is useful for a trader, although these correlations can be hard to be detected, particularly due to the fact that correlation in Forex change frequently.
Market sentiment and the most important macroeconomic factors change daily, leading to changes in correlations among pairs. A strong positive correlation may turn out to be negative; likewise, a correlation on the same pair could be different depending on the time frame of the trade.