A recent interesting phenomenon is worth paying attention to, as the euro's trend is becoming a focal point in the global financial markets. Honestly, a few months ago, no one predicted it would be like this.

Remember three months ago when analysts generally bearish on the euro? At that time, it was forecasted that the euro against the dollar would fall to near parity. But now, the situation has completely reversed, with JPMorgan, Société Générale, and Danske Bank all predicting the euro could rise above 1.20. Just recently, traders have increased their expectations for the European Central Bank's rate cuts this year by nearly half a percentage point.

Why did the euro suddenly become so strong? To a large extent, it is because the uncertainty surrounding Trump’s policies has weakened the dollar’s attractiveness, prompting investors to turn to the euro for safe-haven. As a result, the euro against major trading partner currencies has appreciated by 5%, which has caused real trouble for the European Central Bank.

I noticed that ECB President Lagarde has recently stated multiple times that euro appreciation is "counterintuitive," and even U.S. Treasury Secretary Mnuchin has commented, predicting that the ECB will further cut rates to curb the euro’s strength. The investment manager at Baring Bank bluntly said that if the euro rises above 1.20, the ECB will have to cut its benchmark rate from the current 2.25% to below 1.5% before the end of the year.

What is the logic behind this? On the surface, a strong euro seems like a good thing, but in reality, it will push up the prices of imported goods and intensify deflationary pressures. Goldman Sachs economists forecast that euro appreciation could lead to a decline of about 0.2 percentage points in inflation annually over the next two years. ECB Chief Economist Philip Lane has already warned that the euro’s strength is dragging down the region’s economic recovery.

So now the question is: can the euro still rise? Based on officials’ statements, they are already prepared to respond with rate cuts. ECB Governing Council member Olli Rehn explicitly stated that the euro’s value is crucial when assessing policy. JPMorgan’s FX strategist Sam Zief pointed out that the euro’s strength will further persuade officials not to be too conservative about rate cuts.

Interestingly, the ECB is not the only central bank facing this issue. The Swiss National Bank is also dealing with the appreciation of the Swiss franc, with rumors of lowering interest rates into negative territory. However, Danske Bank analysts believe that the ECB has more room to maneuver compared to the Swiss National Bank, as they still have scope to cut rates. She predicts that the euro against the dollar will eventually rise to 1.21.

Investors are now waiting for the ECB’s June policy rate forecasts to see clues about the future pace of rate cuts. In March last year, the ECB forecasted inflation rates of 1.9% and 2% for 2026 and 2027 respectively, based on an exchange rate of 1.04. If the exchange rate continues to appreciate, these forecasts will surely need to be adjusted accordingly.

Savary, a European strategist at BCA Research, bluntly said: “If the euro rises from 1.01 to 1.20 within six months, it’s a big problem.” Now, it seems that this “big problem” is turning into reality. ECB officials have enough room to loosen policy to push the euro weaker, but the key is whether they are willing to act.