Copper Constructive after its Best Month in Over a Year

Copper Analysis

The US central bank runs its most aggressive tightening cycle in decades, with a series of historically large 75 basis points rate hikes. On Wednesday Chair Powell signaled a slower pace that could come "as soon as the December meeting" ^[1], while yesterday's Personal Consumption Expenditures (PCE) revealed a moderation in inflationary pressures in October.

Mr Powell also noted that a soft landing is "definitely still possible", while US Q3 annualized GDP expanded by a healthy 2.9%, according to the second reading. This was higher than the first reading and vastly improved over the 0.6% contraction of the second quarter.

These news helped the already positive sentiment, fueled by optimism that China will ease its strict zero-Covid strategy, following recent protest against the lockdowns. Although there has not been any clear and concrete shift yet, there has been some easing in various regions and authorities seem intent to optimize their response in order to lower the socioeconomic impact.

These developments helped Copper rebound from its mid-November slump and conclude the month with its best performance since April 2021. This gives it the opportunity to push for 3.961 and set six month highs, that would bring 4.273 in the spotlight.

On the other hand, markets are perhaps overly optimistic around the Fed and China. Mr Powell may have pointed to a downshift, but he also talked of a higher terminal rate than previously expected and of the need to hold police at a restrictive level "for some time".

Despite hopes for less strict Covid-19 policies in the world's second largest economy, infections remain very high, which could make a move away from the zero-Covid strategy difficult. Furthermore, the economic impact of the pandemic disruptions is evident in recent data from China, including this week's PMIs, which showed further contraction in factory activity.

On the technical front, Copper has not yet been able to surpass the 200Days EMA and this creates risk for a pullback towards the 3,620. However, a catalyst will likely be needed for daily closes below it that would pause the upside momentum. Sustained sub-3.500 weakness though is not easy at this stage, as there are multiple support levels.