Another important correlation relationship is EUR/USD, GBP/USD, and EUR/GBP. It is vital to watch the movements between these 3 currency pairs if you plan to trade any one of them. It is important to identify what is moving the market at the time, is it USD, EUR, or GBP? By keeping an eye on the EUR/GBP pair, you can validate or eliminate either currencies, and concentrate on the one that is making the most movement.
It would take a complete new book to fully cover the subject of correlation. But for the purpose of fundamental trading, just understand this fact that one currency cannot move far without affecting the other. Look at this simple calculation and see if you can notice the big picture.
(211.73 / 1.9945) = 106.15
Now do these numbers seem familiar?
GBP/JPY = 211.73 (BID)
Divided by GBP/USD at its current price of 1.9945 (BID)
You get the current price of USD/JPY at 106.15 (BID)
In essence, you can take any price you have on the GBP/JPY and divided in with USD/JPY, and you’ll get GBP/USD price at the time or multiply USD/JPY with GBP/USD and get GBP/JPY current quote.
Market is not perfect. Sometimes we will see slight discrepancies in pricing quotes, but one will not move far from the other. Therefore, when we see related pairs making strong moves one way or the other, it just gives us more confirmation of the direction.
Another interesting point, since GBP/JPY is about twice the value of USD/JPY, a single pip change of value in USD/JPY usually becomes 2 pips of change in GBP/JPY. If both USD/JPY and GBP/JPY are hitting support/resistance areas, then these support/resistance areas might just be stronger.