- October's preliminary eurozone PMIs are set to reflect the impact of the recent surge in COVID-19 cases.
- Previously, the recovery from the virus beat estimates.
- The composite index is show expansion after several months of contraction and may rock EUR/USD.
What is more important, the recent past or the near future? For markets, the answer is usually prospects for the near future – trying to clear up uncertainty. Markit's preliminary Purchasing Managers' Indexes for October are set to provide insights on how the eurozone is doing as the second coronavirus wave is already here.
Until recently, optimism was the name of the game. The old continent's economies seemed to learn to live with the virus and keep it in check. More importantly for markets, doomsters proved too gloomy and the recovery beat estimates.
It was underpinned by a massive bond-buying scheme from the European Central Bank and also a historic announcement from leaders to jointly raise money and provide support mutual support.
However, COVID-19 raised its ugly head once again in a second winter wave – which already came in early autumn. Spain, France, the Netherlands, and Belgium are the hardest hit but also Italy and even Germany are struggling to cope with a surge in cases. Most countries have already imposed restrictions to curb the disease.
How do businesses feel about the change? Economists expect services and manufacturing PMIs to drop across the continent. The French services sector was contracting already in September according to the final figure for that sector and so has the statistics for the whole euro area.
According to the economic calendar, Germany is set to see the same fate, with the Services PMI falling under the 50-point threshold that separates expansion from contraction.
Source: FXStreet Calendar
Three EUR/USD scenarios
On the other hand, the industrial sector is doing better, expanding in France, Germany, and the whole eurozone. The sector has been keeping the currency bloc's composite index afloat above 50 in September. That is set to change now, with a flip from 50.4 to 49.5 points.
The high-level eurozone composite PMI tends to be overshadowed by data from Germany, the largest country, whose data is also released earlier. In the upcoming release, the divergence between Germany and France and between the sector could cause confusion. In turn, that makes room for the compound, a continent-wide indicator to move EUR/USD.
Here are three scenarios:
1) Growth extends: Investors may calculate that governments acting fast could stem the second wave quickly and reopen the economies swiftly. Such a "bump in the road" optimism could keep the composite PMI above 50 and boost EUR/USD.
2) Dip into contraction: Economists may be hitting the nail on the head, projecting a minor slide under the 50-point mark. A minor decline that meets estimates may marginally weigh on the common currency, yet without leaving a long-term impact.
3) Double-dip recession: In case the composite eurozone PMI misses estimates and especially if it tumbles under 49 points, it would send shivers down investors' spines in the old continent, fearing a second downturn that could last for longer. In this scenario, euro/dollar could suffer.
Which scenario is the most probable one? Given the gloomy headlines, it is hard to see the upbeat one materialize, yet doom and gloom could wait for another month – or for the final figures due out in several weeks.
Markit's PMIs are set to reflect businesses' reaction to Europe's second COVID-19 wave and raise fears of a downturn. The reaction in EUR/USD mostly depends on how much the eurozone compound PMI falls.
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