Being in the earth's atmosphere, the compass needle rotates along the lines of the magnetic field. Because of this, the arrow always points in a certain direction, allowing you to navigate in space.
An interesting fact: in near-earth orbit, the direction of the magnetic field lines almost completely coincides with their position on the planet's surface. Because of this, the compass also works correctly. If you rise above the near-earth orbit, then the strength of the magnetic fields will be much weaker. This will not be enough to turn the arrow in the desired direction. Therefore, the compass will not work in outer space. In interplanetary space, only a magnetometer can work correctly, which captures the magnetic field of the Sun. However, it is unlikely that this data can be used for orientation in space.