Eurozone PMIs Preview: How calamitous is the coronavirus carnage? Three scenarios for EUR/USD

• Eurozone PMIs are set to plunge in response to the devastating coronavirus crisis. 
• French figures could have a more significant impact than usual due to their timing.
• The euro is bracing for horrible statistics and may rise if they hold up above 40.
• Figures under 35 could heavily weigh on the common currency.

Corona-recession is already upon the old continent – but what is its depth? Markit's forward-looking Purchasing Managers' Indexes may provide some fresh up to date data on the rapidly-evolving crisis. Economic figures have been lagging as countries rush to impose restrictions to curb the disease and as policymakers make emergency announcements to help the economy. While these PMIs are only surveys – and not actual data – they are set to rock the common currency.

What to expect

Economists expect dire results, between 37.8 to 42.5 points for French, German, and eurozone PMIs in the manufacturing and services sectors – representing severe contraction. Any score above 50 represents expansion, and before the crisis, the eurozone composite PMI stood at 51.6 points, reflecting modest growth. 

With German exports leading the euro area's economy forward, its Manufacturing PMI used to be the most important release. It showed a recession in the industrial sector during 2019 as China suffered from its trade war with the US. Everything is upended now, with the virus hitting all economies. 

EUR/USD reactions

With Covid-19 at the top of the agenda, French figures may have more impact on the euro. First, the eurozone's second-largest economy has seen more deaths and is under more restrictive measures. Secondly, the figures for France are released before German ones.

EUR/USD is set to respond first to French figures, and then to German ones. The overall move in the currency pair may be greater if both countries point to the same direction – either beating expectations or missing them. In case, they offset each other, we may see a whipsaw in euro/dollar. For example, satisfactory French statistics may initially send it up before worrying German data push it down, or the other way around. In pre-coronavirus times, investors tended to shrug off the numbers from France. 

If both sets of figures are horrible, euro/dollar would have substantial room to fall, while if both beat, the common currency has room to surge. 

Three scenarios

As mentioned at the outset, the reaction to these first coronavirus-linked figures depends on how low it falls. With such a considerable plunge on the cards, the round numbers are of higher importance:

1) Above 40: If scores on French and then German PMIs hold above the round number, EUR/USD has room to rise. The narrative would be "it could have been worse," especially as Germany's Manufacturing PMI already hit the 41 handles in 2019. While the common currency has room to rise, the broader market trend is to the downside – the dollar remains king. However, it would help the euro better weather the next storms.

2) Between 35 and 40: A plummet to the below 40 is on the cards according to economists, at least on some of the figures. It would mimic some of China's PMIs and would likely be seen as a reasonable response to the lockdowns across the continent. In this case, EUR/USD would likely trade choppily, reacting to all figures but eventually maintaining its course.

3) Below 35: Scores under 35 would already be reminiscent of 2008 and weigh on the euro, while any number below 30 could trigger a massive sell-off. Even if the economic shuttering of the economy is short-lived, it means that a swift return to pre-crisis levels would be highly unlikely. EUR/USD could tumble down in this case.

What are the probabilities of each scenario? It is hard to say as a coordinated closure of most of the economy is unprecedented. 

Conclusion

Markit's preliminary PMIs for March provide the first crucial view of how Europe is coping with coronavirus and its implications. French and German figures are likely to have equal weight in moving the common currency. Scores above 40 could help the euro bounce while levels under 35 could be devastating.