Euro on upper hand versus dollar owing to Yuan’s devaluation but sustainable gains struggling

We all have been well aware that next key driver for EURUSD is Fed's rate hike expectations but recent dollar's collapse that is created by Chinese bank would probably reveal US may defer this big event to the later during Christmas season. Meanwhile, one can guess that Euro may likely gain more from Chinese devaluation factor, Euro was collapsed from the peaks of May 2014 (almost more than 23%) but for now some sort of ray hope for recovery is seen slightly.

The most significant event for the US dollar will be Vice Chairman Stanley Fischer's remarks on US inflation developments during a panel discussion at the annual Jackson Hole Economic Symposium on Saturday. It has scrupulous relevance as we are getting closer to the September FOMC meeting and market participants continue debating the probability of the FED beginning its normalization cycle at that meeting. Many market experts continue to project a lift-off at the September meeting, but acknowledge that risks are tilted toward a later date amid concerns about global growth and low inflation globally.

In this regard, PCE core on Friday should help markets to get a better assessment about inflation in the coming months. We expect Core PCE Deflator to remain stable at 1.3% YoY, in line with market consensus. We now see EURUSD at 0.98 by year-end and at 0.93 by Q2 16. We expect the USD to remain bid against emerging economies and commodity currencies, which will probably stay on the sidelines or slightly weaker vs G3 pairs. As we have highlighted before, developments in China should continue to drive price action in most financial markets.