The Eurozone’s flash HCOB Composite PMI for January held steady at 51.5, just below the expected 51.6. This was due to a slowdown in the service sector. The Services PMI fell to 51.9 from December’s 52.4, missing predictions of a rise to 52.8. Meanwhile, the Manufacturing PMI rose to 49.4, surpassing both the 49.0 forecast and December’s 48.8. Germany’s economy showed stronger growth in services, with the Services PMI rising to 53.3, surpassing both expectations and December’s figures. However, Germany’s Manufacturing PMI improved slightly to 48.7, still indicating contraction. In France, the service sector shrank, facing political issues related to its 2026 budget.

Eurozone Economy and Currency Trends

The EUR/USD exchange rate tried to stabilize near 1.1728 after the Eurozone and German PMI data was released. The German Composite PMI rose significantly to 52.5 from December’s 51.3, boosted by better service sector performance. Analysts had hoped for a stronger German and Eurozone Composite PMI, given improvements in both manufacturing and services. However, the manufacturing sector still faced some contraction. The HCOB Composite PMI, which surveys senior executives, provides monthly insights into Germany’s business activity. Readings above 50 indicate economic growth, while those below suggest a contraction. As we enter 2026, the Eurozone economy shows familiar sluggishness. Comparing to January 2025, flash PMI data indicated only a weak recovery, a trend that has not notably changed. The economy remains fragile, with growth heavily dependent on the service sector. The European Central Bank has kept its deposit rate at 3.75% due to persistent core inflation, which was around 2.8% at the end of 2025. This creates worries, as last year’s data indicated an economy struggling to gain traction. Any further signs of weakness in upcoming PMI data could heighten expectations for earlier rate cuts.

Sector Divergence and Economic Outlook

The ongoing disparity between sectors, noted in 2025, is still critical. The latest industrial production figures from November 2025 showed a 0.3% decline, confirming that manufacturing continues to contract. We need to see if the services sector can compensate for this industrial weakness or if the slowdown from last year will worsen. Last year, Germany’s economy fared better than France’s, largely due to a stronger service sector. This divergence is key for investment decisions, as continuing weakness in France may negatively impact its equities and bonds compared to Germany. Caution is advised since Germany’s manufacturing sector remains a weak point, as it was in early 2025. With EUR/USD trading around 1.0950, implied volatility in euro options is lower than in previous years. With a stable economic outlook, traders may consider strategies like selling short-dated strangles to collect premiums, betting that the currency stays within a range. However, any unexpectedly weak PMI data could lead to a spike in volatility and a sharp drop in the euro. As we await the January 2026 PMI figures, it’s important to manage positions carefully. The market is sensitive to any data that could influence the ECB’s interest rate cut timeline. A repeat of last year’s disappointing data could challenge euro support, especially if the services component shows significant declines. Create your live VT Markets account and start trading now.

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