Recently, there has been an interesting phenomenon worth paying attention to: the euro’s price action is becoming the focus of global financial markets. To be honest, a few months ago, nobody expected it to turn out this way.

Do you remember how analysts were generally bearish on the euro three months ago? At the time, they predicted that the euro would fall to around parity with the dollar. But now the situation has completely reversed—JPMorgan, Société Générale, and Danske Bank are all forecasting that the euro can still rise to above 1.20. Just in recent weeks, traders have raised their expectations for how much the European Central Bank plans to cut interest rates this year by nearly half a percentage point.

Why is the euro suddenly so strong? Largely, it’s because uncertainty surrounding Trump’s policies has weakened the dollar’s appeal, prompting investors to shift toward the euro for safe-haven purposes. The result is that the euro has already appreciated by 5% against the currencies of its major trading partners, creating real trouble for the European Central Bank.

I’ve noticed that ECB President Lagarde has recently said multiple times that the euro’s appreciation is “counterintuitive,” and even U.S. Treasury Secretary Bessent has weighed in, predicting that the European Central Bank will cut rates further to curb the euro’s strength. A portfolio manager at Baring Bank was blunt: if the euro rises to above 1.20, the ECB must cut its benchmark interest rate from the current 2.25% to below 1.5% before the end of the year.

So what’s the logic here? On the surface, a stronger euro may seem like a good thing, but in reality it will push up the prices of imported goods and intensify deflationary pressure. Goldman Sachs economists predict that euro appreciation could lead to a decline in the inflation rate by about 0.2 percentage points per year over the next two years. Philip Lane, the ECB’s chief economist, has already warned that the euro’s strength is dragging down the region’s economic recovery.

So the question now becomes: can the euro rise even further? Judging by officials’ comments, they are already prepared to respond with rate cuts. Olli Rehn, a member of the ECB’s Governing Council, clearly stated that the euro’s value is crucial when assessing policy. Sam Zief, JPMorgan’s FX strategy director, pointed out that the euro’s strength will further persuade officials not to be overly conservative about rate cuts.

What’s interesting is that the European Central Bank isn’t the only central bank facing this issue. The Swiss National Bank is also dealing with Swiss franc appreciation, and there are even rumors it may cut rates into negative territory. However, Danske Bank analysts believe that the ECB has more room to maneuver than the Swiss National Bank, because they still have room to cut rates. She predicts that the euro will eventually rise to 1.21 against the dollar.

Investors are now waiting for the ECB’s June updates to its price forecasts, hoping to find clues about the future pace of rate cuts. In March last year, the ECB forecast 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 certainly need to be adjusted as well.

Savary, a European strategist at BCA Research, put it plainly: “If the euro rises from 1.01 to 1.20 within six months, that’s a big problem.” Now it appears that this “big problem” is becoming a reality. ECB officials have enough space to loosen policy and push the euro softer, but the key is whether they’re willing to take action.