Copper Slips as Dollar Strengthens Ahead of Fed Meeting

Copper prices took a hit in London as investors looked ahead to Wednesday's Federal Reserve meeting and the impact it could have on interest rates. The US dollar is currently near a four-week high, which has put pressure on copper prices as they're priced in dollars. A stronger greenback makes copper more expensive for non-US buyers, while higher US Treasury yields can also tighten financial conditions and cool demand.

However, the physical market is sending a different signal. LME warehouse copper inventories have dropped to 268,775 tons, the lowest since March. This has created a cash-to-three-month spread of $33-a-ton backwardation, meaning buyers are paying more for immediate delivery than for copper in three months.

This is significant because a backwardated market indicates tight nearby supply. When the curve is in backwardation, holding metal now is more valuable than holding a contract for later delivery. This can be painful for producers or traders who are effectively 'short' near-term copper, as they may repeatedly pay the spread when rolling their positions forward.

The result is often bigger day-to-day swings in LME calendar spreads than in the headline three-month price. This helps explain why copper can struggle to fall very far even when macro forces push the broader commodity complex lower.