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Copper Comes A Cropper

As the last full trading week of February comes to a close, we’ve seen several key developments with the January FOMC minutes, the first comments from incoming BOJ head Ueda and the G20 summit getting underway. Looking across markets, we haven’t been treated to as many big moves as we’ve seen in prior weeks. However, there has still been some noteworthy action, and chatting with traders ahead of the weekend it seems the big move capturing the most attention is the almost 5% reversal lower in Copper from the week’s highs. So, let’s take a look at what caused the move and, as ever, if you caught it. Well done! If not? There’s always next week!
 

What Caused the Move?

Hawkish Fed Expectations

The main driver behind the decline in copper from the initial highs of the week has been the uptick in hawkish Fed expectations. On the back of the recent run of hot US data we’ve seen, the market has become increasingly wary of the Fed adopting a more hawkish stance. Having pivoted away from larger hikes twice now, the recent increase in January inflation has spooked markets a little, raising the risks of the Fed stepping back up the pace of its tightening campaign.
 

FOMC Minutes

This week, the FOMC minutes on Wednesday were seen bolstering this hawkish narrative. The minutes showed that several members were in support of a larger hike in January, ahead of getting the news that inflation had spiked again. These details in line with the jump in CPI have seen market pricing for a larger .5% hike in March rising from less than 10% to around 25%.
 

Downside Risks for Copper

As a result of the resultant strength in USD and US yields, commodities prices have been hit sharply with copper in particular suffering. Today the market will receive a further piece of US data with the latest core PCE reading due. Should we see strength in this reading, copper prices are likely to fall further near-term with a sharpened focus on the chances of a larger hike in March or a more hawkish outlook from the Fed.
 

Technical Views

Copper

(Click on image to enlarge)

The second attempt at breaking above the 4.1185 has seen the market failing and falling back below the level. With momentum studies turned bearish here, the focus is on a further push lower while under the level with 3.9410 the next support to watch. A break of this level will open the way for a deeper move towards 3.6745.

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