Sub-par Purchasing Managers Index (PMI) readings from Germany and France have driven the EURUSD to fresh lows and triggered renewed fears about the outlook for the Eurozone economy.

Weak French and German PMI data for February sent EURUSD plunging to fresh year-to-date lows as the pair broke through the 1.3200 level in morning European trade. The French PMI Services report hit 42.7 (versus 44.5 expected) and reached a fresh 48-month low. French PMI Manufacturing improved to 43.6 (from 42.9), but nevertheless, it fell short of the 43.9 forecast.

In Germany, the PMI Manufacturing report came in at 50.1 (versus 50.4 expected), while the PMI Services data declined to 54.1 (versus 55.5 expected). Overall, the Eurozone flash PMI numbers also missed their mark, with manufacturing coming in at 47.8 (versus 48.4 projected), and services plunged to 47.3 (from 49.2 expected).

Both the manufacturing and service sectors remain well below the 50 boom/bust line, indicating that Eurozone GDP will continue to contract in Q1 of this year. Some analysts have even predicted that Eurozone growth will not turn positive until Q3 of 2013.

This latest data stands in sharp contrast to the consensus market expectations that the region would see a turnaround in growth as soon as Q1 of this year. The latest business sentiment surveys have lulled currency traders into thinking that economic conditions are beginning to improve, but today’s reports clearly signal the opposite.

EURUSD has found some support near the 1.3200 figure, but this news is likely to weigh heavily on the pair, and if risk aversion flows accelerate as the North American session comes online, then the pair could test the 1.3150 level as the day progresses.

Is a New Crisis Wave Brewing in the Eurozone?

So far, the weakness in the economic data has not translated into any problems in the region’s credit markets, with both Spain and France today able to raise funds at the upper end of their ranges. However, if growth continues to be negative for the first half of this year, investor concerns are sure to surface even with the “implied put” offered by the European Central Bank’s (ECB) Outright Monetary Transaction (OMT) program.

At the very least, if Eurozone periphery countries are unable to generate economic growth and sustainable revenue to service their budgets, they may be forced to formally enter into the program. So far, Spain has managed to avert this fate, but if conditions worsen, the troubled nation may face the unpleasant prospect of doing so.

While most Eurozone officials and pundits have been patting themselves on the back and declaring the union to be secure, their celebration may be premature. Weak economic growth is sure to create massive backlash against austerity and may once again put a very serious strain on the union. Little wonder, then, that the EURCHF is starting to express those concerns, slipping below the 1.2300 level in today’s trade.

With jobless claims and flash PMI readings due today in the US, the economic focus will shift stateside in North American trade. Markets are looking for little change in both data points, but if the reports miss expectations and trigger another wave of risk-off selling, again, EURUSD could test 1.3150.

More: See the complete Economic Calendar

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.Learn forex trading with a free practice account and trading charts from FXCM.
Source: Daily fx