The Eurozone’s flash HCOB Composite PMI in January remained steady at 51.5, slightly below the expected 51.6, due to a slowdown in service sector activity. The Services PMI dropped to 51.9 from December’s 52.4, missing an anticipated rise to 52.8, while Manufacturing PMI increased to 49.4, surpassing both the 49.0 consensus and December’s 48.8.
Germany’s economy showed a faster expansion in services, as indicated by a rise in the Services PMI to 53.3, exceeding both forecasts and December’s figures. Meanwhile, Germany’s Manufacturing PMI slightly improved to 48.7, yet still indicated a contraction. France, however, experienced a contraction in services amid political challenges with its 2026 budget.
Eurozone Economy and Currency Trends
The EUR/USD attempted to stabilize near 1.1728 following the Eurozone and German PMI data, with the German Composite PMI notably rising to 52.5 from December’s 51.3, bolstered by positive service sector activity. Analysis predicted a higher German and Eurozone flash Composite PMI due to improvements in both manufacturing and service sectors, although the overall business activity in manufacturing still faced moderate contraction.
The HCOB Composite PMI, a monthly indicator from surveys to senior executives, helps gauge Germany’s business activity, influencing the Euro with readings above or below 50 indicating economic expansion or contraction respectively.
The Eurozone economy shows a familiar pattern of sluggishness as we begin 2026. Looking back at this time in January 2025, the flash PMI data pointed to a feeble recovery, a situation that has not significantly changed. We continue to see a fragile economy where any growth is heavily reliant on the services sector.
The European Central Bank is now holding its deposit rate at 3.75%, a decision influenced by persistent core inflation that hovered around 2.8% at the end of 2025. This creates tension, as last year’s data already showed an economy struggling to gain momentum. Any further signs of economic weakness in the upcoming PMI data could increase market bets on earlier rate cuts.
Sector Divergence and Economic Outlook
The divergence between sectors we saw in 2025 remains a critical focus. The latest industrial production figures from November 2025 showed a 0.3% decline, confirming that the manufacturing base is still contracting. We must watch to see if services can continue to offset this industrial weakness, or if the slowdown we saw in that sector last year will worsen.
Last year, Germany’s economy outperformed France’s, largely due to its stronger service sector. This divergence is important for relative value trades, as ongoing weakness in France could weigh on its equities and bonds compared to Germany. We should be cautious, as the German manufacturing sector remains its weak point, just as it was in early 2025.
With EUR/USD currently trading near 1.0950, implied volatility in euro options is relatively subdued compared to recent years. Given the flat economic outlook, traders might consider strategies like selling short-dated strangles to collect premium, betting that the currency remains range-bound. However, any surprisingly weak PMI data could cause a spike in volatility and a sharp move lower, breaking the current calm.
As we await the January 2026 PMI figures, positions should be managed carefully. The market is sensitive to any data that could shift the ECB’s timeline for interest rate cuts. A repeat of last year’s miss on expectations could test support for the euro, especially if the services component shows significant decline.
