The current fundamental backdrop for EUR/USD favors further price growth—only strong PPI/CPI reports can "redraw" the overall picture if they come in strong. However, even a rise in US inflation is unlikely to help the greenback (other than for a brief moment), as that outcome would point to looming stagflation. In other words, EUR/USD still has growth potential, albeit with southern pullbacks.

On Monday, France was left without a government again after deputies in the lower house of parliament passed a vote of no confidence in Prime Minister Francois Bayrou. Notably, this was his second "test by parliament," as earlier this year he used a special procedure to pass the budget, bypassing the National Assembly. Article 49.3 of the Constitution allows this, but only if parliament expresses confidence in the government. The PM was able to pull off this scheme by persuading the Socialists to remain neutral. But this time, the assorted opposition (right and left) united and, by a landslide (364 votes), voted against Bayrou's government. Now that the PM is about to resign, Macron will (surely) accept it and appoint a new prime minister. Elysee Palace sources said this will happen "in the coming days."

There was no intrigue over the parliamentary decision: right- and left-wing parties announced they would vote for no confidence. So the result surprised no one. Some intrigue remained about Macron's next move. Insiders said the president is not keen to dissolve the National Assembly and hold snap elections. However, Macron is known for making risky political moves, and changing the PM does not solve the problem. With the current parliament, none of Macron's governments will have a majority.

Given this ongoing intrigue, EUR/USD traders reacted positively to the news that Macron will try to resolve the crisis with a new PM rather than through snap elections (after which the far right could take power).

As a rule, political fundamentals don't last long. The market was satisfied to learn the National Assembly's composition will remain, but will turn to other fundamental factors—namely, the PPI/CPI reports from the US on Wednesday and Thursday.

That's why EUR/USD longs are currently risky, despite "technical" signals for long positions. If US inflation accelerates more than expected, the market will start doubting that the Fed will ease monetary policy aggressively. At this moment, such expectations dominate among traders. According to CME FedWatch, the probability of a 25 bp rate cut at the Fed's September meeting is 88%. The market also assigns a 12% chance to a 50 bp cut this month. Moreover, even if the Fed limits itself to a 25 bp cut, traders are nearly certain that the central bank will lower rates again by 25 or even 50 points before year-end.

Dovish expectations increased after the release of August Nonfarms, which showed weak job growth (just 22,000). In addition, US unemployment rose to 4.3% (the highest level since July last year), while wage growth slowed to 3.7%.

Such poor results truly favor dovish sentiment. However, if US inflation accelerates more than expected, the market will question whether the Fed will cut rates aggressively. According to preliminary forecasts, the overall PPI will accelerate to 3.6% y/y, the highest since January 2025, after rising to 3.3% the previous month. The core Producer Price Index should also accelerate to 3.8%, after 3.7% in July. Headline CPI should rise to its highest level since January this year—2.9%, while the core index may remain at last month's level: 3.1%.

Clearly, the preliminary forecasts do not favor EUR/USD buyers. So caution with longs is advised, particularly near the resistance at 1.1800 (the upper Bollinger Band on H4). In my opinion, the pair will try to test the 1.18 area, but if CPI/PPI figures are strong, a significant pullback—to at least the 1.1670 support level (the middle Bollinger Band, which matches the Tenkan line on D1)—will follow.