Palladium Price Forecast: There Is More to It Than the Bullish Demand Outlook

• Palladium price has bounced off the recently hit 4-month low amid concerns over reduced supply.
• With the bullish demand outlook, it may have found its short-term bottom.
• A strong US dollar will continue to curb its gains in the ensuing sessions. 

Demand/supply imbalance

Earlier in the week, Metals Focus reported that improved demand and reduced supply is set to boost palladium price in the coming months. Indeed, the demand/supply imbalance is expected to yield a shift from the surplus recorded in 2021 to a significant deficit. According to the research consultancy, the metal market, which is about 10 million ounces a year, is set to drop to a deficit of 521,000 in the current year.  

As an industrial metal, palladium is largely used in automobiles to neutralize harmful emissions in the engine exhaust system. In the past year, chip shortage forced automakers to reduce production. As the sector recovers from the shortage in the current year, heightened demand is set to boost the metal’s prices. 

The US retail sales data released on Tuesday further pointed to the high demand for automobiles. Indeed, the recorded increase in vehicle purchases is one of the factors that contributed to April’s figure of 8.19% YoY compared to the prior 7.34%.  

At the same time, Metals Focus sees supply constraints as another key bullish driver. Russia is the second-largest producer of palladium. With the ongoing war with Ukraine, supply disruptions are expected to continue into the coming months. Besides, production in South Africa, which is the leading palladium producer in the world, is also predicted to decline. 

Firm dollar

Palladium price is also finding support in the pullback of the US dollar. Late last week, the dollar index hit its highest level in 20 years at $105.00. Since then, it has pulled back to $103.72 as of the time of writing. In the previous session, it hit an intraday low of $103.23 before bouncing back. Even so, it remains strong. It has been holding steady above $102.00 for three weeks, a level that has been evasive since March 2020. 

The strong US retail sales data released on Tuesday has boosted the currency after it hit an intraday low of $103.19. Even with the high inflation, retail sales in April rose by 8.19% compared to the prior month’s 7.34%.  The figures have added to the bets on aggressive policy tightening by the Federal Reserve. 

Earlier in the week, the Fed Chair indicated that the central bank is set to hike rates as needed to deal with the heightened inflationary pressures that are threatening the stability of the US economy. So far, it has increased the rates by 75 basis points and is set to raise them further by 50 basis points in its June and July meetings. 

Palladium price technical outlook

After hitting an all-time high of $3,410.44 in early March, palladium price has been on a downtrend, hitting a four-month low of $1,843.18 in the past week. Amid the bullish demand outlook, it has since rebounded to $1,964.69 as of the time of writing.    

With the firm US dollar, palladium price gains will likely remain curbed in the short term. In particular, the range between $2,115 and $1,937 will be worth looking out for in the ensuing sessions. If the bulls gather enough momentum to push the price past the range’s upper border, the psychologically crucial level of $2,200 will likely be a key resistance zone.  On the flip side, a pullback will likely have the bears retest the recent low of 1,843.18.