Module 6C: Fundamentals for Technical Traders · Lesson 4 of 4 · Back to course
Markets don’t move in isolation. A change in US bond yields can move the dollar, which can move gold, which can move mining shares in the FTSE 100. Intermarket analysis is the study of these links. For a beginner, it’s mainly useful for two things: understanding why your market moved, and avoiding positions that are secretly the same bet.
First, what correlation means
Correlation measures how closely two markets have moved together in the past, on a scale from −1 to +1:
- +1: they moved in the same direction, in step.
- 0: no consistent relationship.
- −1: they moved in opposite directions, in step.
Two warnings before we start. First, correlation describes the past; it says nothing certain about tomorrow. Second, correlation isn’t causation – two markets can move together because a third thing (like a change in interest-rate expectations) is driving both.
The main links
1. Bond yields and currencies
A bond yield is the return an investor gets for lending to a government. Bond prices and yields move in opposite directions: when prices fall, yields rise.
Yields reflect where markets expect interest rates to go, so they often lead currencies. If UK two-year gilt yields rise relative to US two-year Treasury yields, it suggests markets expect UK rates to stay relatively higher, which tends to support GBP/USD. The difference between two countries’ yields (the “yield spread”) is often more useful than either yield alone.
2. The US dollar and gold
Gold is priced in US dollars worldwide. When the dollar strengthens, gold becomes more expensive for buyers using other currencies, and gold often falls; when the dollar weakens, gold often rises. Gold also pays no interest, so rising real (after-inflation) interest rates have often weighed on it. But gold is also a safe haven (Lesson 6C.3), so in a scare both gold and the dollar can rise together.
3. Oil and “commodity currencies”
Some currencies are linked to what their countries export. The Canadian dollar (CAD) has often moved with oil prices, and the Australian dollar (AUD) with metals and Chinese demand. So a big move in oil can show up in USD/CAD, and a move in iron ore or copper can show up in AUD/USD.
4. Stock indices and bonds
In many periods, shares and government bonds have moved in opposite directions: when shares fall, investors buy bonds, pushing bond prices up and yields down. But this depends on what’s worrying markets. When the fear is about inflation and rising rates, shares and bonds can fall together, as they did in 2022.
5. The pound and the FTSE 100
A large share of FTSE 100 companies’ earnings comes from overseas, in dollars and other currencies. When the pound weakens, those overseas earnings are worth more in pounds, so a weaker pound has often coincided with a firmer FTSE 100 – and a stronger pound with a softer one. The more UK-focused FTSE 250 has often been less tied to this effect. Treat this as a loose tendency: on many days, company news, oil prices or the global mood will matter far more.
A quick map
| If this happens… | …these often react | Tends to be |
|---|---|---|
| US yields rise sharply | USD stronger; gold weaker; US tech stocks under pressure | Common, not reliable |
| UK yields rise relative to US | GBP/USD firmer | Common when driven by rate expectations |
| Oil jumps | CAD stronger (USD/CAD lower); energy shares in FTSE 100 up | Loose |
| Pound falls sharply | FTSE 100 can be supported in sterling terms | Loose |
| Global scare (risk-off) | Gold, JPY, CHF, USD up; indices and AUD down | Common, with exceptions |
Why links break down
Correlations aren’t fixed. They shift because:
- The main driver changes. For a while, inflation might dominate everything; later, growth fears might.
- Specific news overrides the link. A UK political shock can move the pound regardless of yields elsewhere.
- Central banks step in. Bond buying or selling can change normal bond behaviour.
- Short timeframes are noisy. A relationship visible on daily charts may barely exist on a 5-minute chart.
The practical lesson: use intermarket links as context and a risk check, not as an entry signal.
Common mistakes
- Trading one market off another. “Gold is up, so I’ll sell USD/JPY” adds a second layer of uncertainty to your trade.
- Assuming a correlation you saw last year still holds. Check it on recent data first.
- Missing doubled-up risk. Long EUR/USD and long GBP/USD are both short-dollar trades. They’ve historically been strongly positively correlated, so together they behave like one larger position.
- Over-complicating. Watching ten markets before every trade leads to paralysis. Two or three related markets are plenty.
Example (illustrative numbers)
All figures are made up for teaching purposes. They aren’t real prices or a trade idea.
A trader has two trades open, each risking 1% of a £10,000 demo account (£100 each):
- Long EUR/USD, stop 30 pips away
- Long GBP/USD, stop 35 pips away
They think of it as two separate trades risking £100 each. Then a strong US jobs report comes out and the dollar rallies across the board. Both pairs fall together and both stops are hit within ten minutes. Total loss: £200, or 2% – from what was really one view: “the dollar will weaken”.
If their plan had said “count highly correlated trades as one, and risk no more than 1% on a single idea” (see correlation and over-exposure), they would have taken just one of those trades, or halved the size of each.
The prop firm angle
Hidden correlation is one of the quickest ways to breach a daily loss limit without breaking any single-trade rule. Before a challenge, add two lines to your plan:
- A list of which markets you trade that tend to move together (for example: EUR/USD and GBP/USD; DAX and S&P 500; gold and silver).
- A rule for how you size correlated trades – for example, “two correlated trades share one trade’s risk”.
Key takeaways
- Common links: yields lead currencies, the dollar and gold often move opposite, oil links to CAD, shares and bonds often move opposite, and a weaker pound has often supported the FTSE 100.
- All of them are tendencies that change over time – sometimes reversing completely.
- Correlation describes the past and doesn’t prove cause.
- The most practical use is spotting when several positions are really one bet.
Quick quiz
- What does a correlation of −1 mean? (The two markets moved in exactly opposite directions.)
- If a bond’s price falls, what happens to its yield? (It rises.)
- Why might a weaker pound support the FTSE 100? (Many FTSE 100 companies earn a lot overseas; those earnings are worth more in pounds when the pound falls.)
- Which currency has often moved with oil prices? (The Canadian dollar.)
- You’re long EUR/USD and long GBP/USD. What single view are you really expressing? (That the US dollar will weaken.)
Key terms
Intermarket analysis · Correlation · Bond yield · Gilt · Safe haven · Exposure · Index · Also see Trading jargon in plain English.
Try this
On a free charting platform, open daily charts of GBP/USD and EUR/USD side by side for the last six months. Many platforms have a correlation indicator; if yours does, add it with a 20-day setting. Note how high the reading usually is and whether it ever dropped sharply. Then do the same for gold and USD/JPY. You’ll see that correlations wander – which is exactly why they’re a risk check rather than a signal.
FAQ
Do I need to watch bond yields to trade forex? Not to start with. But if you trade GBP/USD regularly, glancing at UK and US two-year yields helps explain bigger moves.
Are correlations the same on every timeframe? No. Relationships seen on daily or weekly charts are often much weaker on short intraday charts.
What’s a sensible number of related markets to watch? Two or three. For GBP/USD, that might be the US dollar index, UK and US two-year yields, and the FTSE 100.
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.