03.03.202310:54 Forex Analysis & Reviews: The Fed is ineffectively fighting inflation

By the end of the week, the euro and the pound had deteriorated sharply when compared to the US dollar, but today could be different, especially in light of statistics showing a sharp increase in activity in the services sectors of the eurozone and the UK. This will likely lead to new discussions about the impending spring inflationary pressures that these nations will face. Now, though, I want to briefly discuss something else.

There is constant discussion in the US about whether the Federal Reserve is acting morally by putting the economy at risk and sacrificing the labor and housing markets to get inflation back to its pre-crisis level.

Recent comments by economist Peter Schiff on this topic revealed some of his preconceptions, according to which the US economy may suffer greatly from the Federal Reserve's battle against inflation. Schiff stated: "We had experienced months of lowering inflation very recently, but suddenly everything has shifted." Schiff was referring to recent economic statistics, notably the personal consumption price index, which increased by 0.6% in January.

The economist argued that the Fed's campaign against inflation is entirely ineffectual, noting: "If the Fed is serious about battling inflation, which I doubt, it would have to fight much harder than it is right now. The rates should increase significantly more than the levels anticipated."

Nevertheless, in Schiff's opinion, simply raising interest rates won't be sufficient. "Moreover, consumer lending should significantly decline. Loan rates must rise to a point where consumers will exercise financial restraint," he said. "People are making purchases. Their credit card debt increases. Inflation rises as a result of this. Customers must cut back on their spending." The economist emphasized that instead of spending, people should work, produce, and save.

Also, according to Schiff, the federal government must take charge of the expenditure issue: "Government spending needs to be significantly reduced. Because it drives up costs, the government cannot just hand out cash to the populace."

Since Fed Chairman Jerome Powell has recently repeatedly mentioned the imbalance between supply and demand, it is clear that Schiff is on the right track. If we can somehow influence this demand—which can be done by reducing consumer lending—then it will return to normal inflation levels a little more quickly. Another factor is that this will slow down GDP growth, but the Biden administration will still criticize the Fed in this case, especially in the years leading up to the elections.

After the conversation, Schiff warned that if nothing is done, the Fed's activities will trigger a financial crisis or, even worse, an economic catastrophe. Additionally, he issued a warning that the Fed might even force the US government to take legal action against Social Security and Medicare cuts.

In light of this, it is not surprising that there is sensitivity to and demand for the US dollar as a safe-haven asset.

Regarding the EUR/USD's technical picture, the pair is still under pressure, although today there is a potential for an upward correction. To restart the bull market, 1.0600 must be held and 1.0630 must be broken. You can easily advance from this level to 1.0660 and 1.0730 with the chance of doing so soon. If the trading instrument declines, I only anticipate activity from significant buyers around 1.0600. If no one is present, it would be preferable to hold off on initiating long positions until the 1.0565 low has been updated.

Regarding the technical analysis of the GBP/USD, the bulls have even more difficulties. Buyers must rise above 1.2000 to regain control of the situation. The only way to increase the likelihood of a subsequent recovery in the area of 1.2030 and 1.2070, after which it will be able to discuss a more rapid movement of the pound up to the area of 1.2220, is if this resistance fails to hold. The breakdown of this range, which would occur if the bears took control of 1.1950, would strike the bulls' positions and drive the GBP/USD back to 1.1920 with potential growth to 1.1870.