Palladium Price Outlook: Here’s What Driving the Market

• A strong US dollar has been curbing palladium price’s upward potential.
• Even so, with the predicted supply deficit, it may record further gains in the coming weeks.
• To yield a trend reversal, the bulls will need to break the resistance around $2,100. 

What’s  behind the range-bound trading?

Supply concerns

Concerns over tight supplies have continued to offer support to palladium price in recent weeks. According to Metals Focus, the palladium market of about 10 million ounces per annum is set to record a deficit in the current year. 

In 2021, it reached a surplus for the first time in a decade. This resulted from the extensive chip shortage and subsequent decline in the production of automobiles. Amid improving demand and tight supplies, that will likely shift to a deficit of 521,000 ounces in the current year.

Notably, the ongoing Russia-Ukraine war is one of the aspects behind the predicted deficit. Russia accounts for about 25-30% of the global palladium supplies. As such, sanctions from the West and the resultant supply chain disruptions have had a significant impact on the palladium market, which will likely continue in the coming months.

While South Africa, another leading source of the metal, is in a position to fill the gap, disruptions in electricity supply and probable staff strikes may also affect supplies. Besides, according to Johnson Matthey’s report, Anglo and Impala are set to take major maintenance projects on their furnaces in the current year. Notably, these are two of the largest PGM (platinum group metals) producers in the African country. 

While the maintenance work will not impact the amount of product mined, it tends to increase the inventories that are ‘work in progress.’ This explains why both firms have lowered their production guidance for their current financial year. 

Strong US dollar

The value of the US dollar is another factor behind the range-bound trading in the palladium market. As is the case with other commodities, a strong US dollar makes the metal more expensive for buyers holding other currencies. This explains why the palladium price moves inversely to the value of the greenback. 

After hitting a 20-year high about two weeks ago, the dollar index has eased to $101.67 as at the time of writing. Even so, it has been trading above the psychologically crucial level of 100 since early April; a zone that had been evasive for two years. 

Prospects of interest rate hikes and concerns over global economic growth have strengthened the greenback while weighing on palladium and other precious metals. However, with the market having priced in a hike of 50 basis points during the Fed’s June and July meetings, Wednesday’s FOMC minutes didn’t yield significant movements in the currency. 

The policymakers are keen on easing the decades-high inflationary pressures without pushing the US economy into a recession. During the central bank’s interest rate decision earlier in the month, Jerome Powell stated that the officials are not actively considering a hike of 75 basis points.  Later in the day, the PCE price index is set to impact the value of the US dollar and palladium price by extension.

Palladium price forecast

Palladium price is hovering around the psychologically crucial level of 2,000 as has been the case for over a week now. Indeed, the horizontal channel between 1,937.03 and 2,096.57 remains a critical one. The horizontal channel’s upper border lies slightly above the 25-day EMA. As of the time of writing, it was at 1,992.90. 

While it has bounced off Wednesday’s low, it remains below the 25 and 50-day exponential moving averages. In the ensuing sessions, I expect the metal to remain within the aforementioned range. However, a bounceback of the US dollar may yield a pullback past the range’s lower border. If that happens, the bears may have an opportunity to retest the month’s low of 1,843.18.