The Euro's Undervaluation and 2026 Upside Potential Amid Eurozone Recovery

The euro has long been a barometer of Europe's economic resilience, and 2026 may mark a turning point in its valuation. With the eurozone poised for a modest but meaningful growth pickup, supported by stabilizing inflation and strategic fiscal measures, the EUR/USD pair appears undervalued relative to its fundamentals. Meanwhile, the Swiss franc (CHF) continues to serve as a diversification asset, but its role as a safe haven may not offset the euro's longer-term appeal. This analysis examines the interplay of growth, monetary policy, and market dynamics to argue for a strategic tilt toward the euro in 2026.

Eurozone Growth: A Modest but Sustainable Pickup

ING's latest forecasts underscore a cautiously optimistic outlook for the eurozone. The bank projects an average growth rate of 1.1% in 2026, following an estimated 1.4% expansion in 2025. This trajectory, while modest, reflects a stabilization of key sectors and a gradual unwinding of base effects from earlier economic headwinds. Notably, the eurozone's energy transition is gaining momentum, with renewable generation surging in Q3 2025-solar output alone reached 109 TWh, while wind generation hit 108.9 TWh. These trends are reducing reliance on volatile fossil fuel markets and easing inflationary pressures, creating a more predictable macroeconomic environment.

Fiscal stimulus, though limited in scope, is also playing a role. While the eurozone has avoided large-scale fiscal expansions, targeted measures-such as Germany's green infrastructure investments and France's labor market reforms-are supporting growth without reigniting inflation according to ING's analysis. This contrasts with Japan's recent 21.3 trillion Yen stimulus package, which has raised concerns about fiscal sustainability and weakened the yen according to FXStreet reports. The eurozone's more disciplined approach positions it to avoid the currency depreciation risks seen in other regions.

ECB Policy: A Data-Dependent Tightening Trajectory

The European Central Bank (ECB) has adopted a measured approach to its tightening cycle, prioritizing inflation stability over aggressive rate adjustments. As of October 2025, the ECB's deposit rate stands at 2.00%, with markets pricing in an implied rate of 1.852% by year-end 2026. This suggests minimal chances for further rate cuts in 2025 and only marginal adjustments in 2026, reflecting the central bank's commitment to maintaining a neutral policy stance.

The ECB's caution is justified by the current inflation landscape. Core inflation (excluding energy and food) remains at 2.3%, close to the 2% target, while energy prices have declined significantly-gas prices averaged EUR 32.98/MWh in Q3 2025, down 15% year-on-year. These developments reduce the urgency for rate cuts and allow the ECB to focus on structural reforms and financial stability. A key inflection point will be the December 2025 inflation forecast, which will determine whether the ECB pivots toward easing in 2026 according to Morningstar analysis. For now, however, the central bank's data-dependent approach supports a stable policy environment, which is favorable for the euro.

EUR/USD Fair Value: A Case for 1.20

The EUR/USD pair is currently undervalued, with fair value estimates pointing toward a potential move toward 1.20 by mid-2026. This projection is supported by three key factors:

1. Energy Price Stability: The eurozone's energy transition is reducing exposure to volatile commodity markets. With solar and wind generation at record levels, energy costs are stabilizing, which supports consumer spending and corporate margins. This dynamic contrasts with the U.S., where energy prices remain more exposed to geopolitical risks.

2. Fiscal Confidence: Strong demand for EUR-denominated bonds, such as UOB's EUR850 million covered bond issuance priced 1 basis point inside fair value, highlights investor confidence in the euro. This suggests that the euro's risk premium is narrowing, a positive signal for its valuation.

3. Stablecoin Dynamics: While stablecoin activity is not explicitly tied to the eurozone, the broader trend of institutional demand for EUR-backed assets reinforces the currency's appeal. The euro's role in cross-border trade and its use in stablecoin collateral (e.g., EUR-pegged tokens) position it to benefit from the growing digital asset ecosystem.

These factors, combined with the ECB's neutral policy stance, create a compelling case for the euro to outperform the dollar in 2026. A fair value of 1.20 aligns with the eurozone's improving growth outlook and the U.S. Federal Reserve's expected tightening cycle, which is likely to remain constrained by inflation risks.

EUR/CHF Dynamics: Diversification vs. Growth

The Swiss franc (CHF) remains a strategic currency for diversification, particularly in volatile markets. Its historical resilience-strengthening during periods of global uncertainty, and Switzerland's disciplined fiscal management make it an attractive hedge. For U.S. investors, CHF allocations can reduce currency risk and provide non-correlated returns according to LFA research. However, the franc's strength is a double-edged sword: while it offers downside protection, it also limits upside potential in a eurozone recovery.

The EUR/CHF pair currently reflects this tension. A stronger euro (e.g., EUR/CHF above 0.95) would signal improved risk appetite and confidence in the eurozone's growth trajectory. Conversely, a weaker euro would reinforce the franc's safe-haven appeal. Investors must weigh these dynamics carefully, but the euro's structural advantages-particularly its role in the global economy and its alignment with decarbonization trends-suggest that the CHF's diversification role should complement, rather than dominate, a broader EUR-centric strategy.

Conclusion: Strategic Positioning for 2026

The euro's undervaluation is a temporary anomaly in a eurozone poised for a sustainable growth pickup. With ING forecasting 1.1% GDP expansion in 2026 and the ECB maintaining a neutral policy stance, the EUR/USD pair is well-positioned to move toward 1.20. While the Swiss franc offers valuable diversification benefits, the euro's longer-term appeal-driven by energy transition, fiscal discipline, and institutional demand-makes it a compelling strategic asset. Investors should consider a balanced approach, leveraging the euro's growth potential while using the CHF to hedge against macroeconomic shocks.