No one is under any illusions. Neither Francois Bayrou, regarding his chances of remaining Prime Minister of France, nor Friedrich Merz, nor the armed conflict in Ukraine will end soon. Both events are negative for the euro and are holding back EUR/USD from moving higher. Additionally, the market still can't figure out what the US Court of Appeals ruling—declaring Donald Trump's tariffs illegal—means for Forex. How will it affect the US dollar?

Dynamics of the France-Germany bond yield spread

Rising political risks in Europe, evidenced by the widening yield spread between French and German bonds, are not preventing the eurozone's second-largest economy from growing. Its manufacturing sector activity index jumped above the critical 50 mark for the first time in 2.5 years, signaling expansion.

In theory, the opposite would be true. A political crisis generates uncertainty, leading people to save instead of spend, and contributes to declining purchasing managers' indexes. Apparently, the PMIs know more than the rest of us and are looking to the future with optimism.

Dynamics of France's business activity

France continues to pull the spotlight, but US events matter even more. The market still doesn't know how to digest Donald Trump's defeat on key elements of his campaign promises. The conflict in Ukraine hasn't ended. Reshaping the US economy through tariffs failed. The Appeals Court declared them illegal by a 7–4 vote.

The White House is trying to put on a brave face. They point to impressive dissent. If so, there's hope the Supreme Court will side with the president. Legal proceedings continue, tariffs aren't repealed yet, and global trade is in shock.

In theory, scrapping US import tariffs is good for the European and global economies. That should be positive for EUR/USD. However, the USD index fell by 10% in the first half of the year when the tariffs were implemented—the highest since the 1930s. Could lifting them now spark a move in the opposite direction?

If there are no tariffs, US inflation is unlikely to accelerate. The Federal Reserve will be free to cut rates without guilt. That's bad for EUR/USD bears. However, if the labor market problems in May–July were temporary and the US economy remains very strong, why weaken monetary policy at all? There are many questions. It would be no surprise if investors decide to pause until the August jobs data are released.

On the daily EUR/USD chart, we've seen another attempt to break out above the fair value range of 1.1565–1.1715. A successful push beyond the upper boundary increases the risk of an uptrend resumption and is a signal to buy. Failure means the pair is likely to continue consolidating.