Recently, the euro's rally has been quite fierce, and the underlying central bank policy issues involved are becoming increasingly complex.

Simply put, the euro has been appreciating since June last year, and now it has risen to a level that is causing headaches for the European Central Bank. Major institutions like JPMorgan and BNP Paribas predict that by the end of the year, EUR/USD could surge above 1.20, which is completely different from analysts' expectations a few months ago of parity. Just in the past month, traders have raised their expectations for the ECB's rate cuts this year by half a percentage point.

Why is the euro so strong? Mainly because Trump's trade policies have caused widespread anxiety, reducing the attractiveness of U.S. assets, and investors' money has started flowing into euros. This is the opposite of what was expected a few months ago—back then, everyone thought Trump's policies would push up inflation, prompting the Federal Reserve to slow or even raise interest rates, which would strengthen the dollar. But now, the euro is getting stronger instead.

However, this is a double-edged sword for the European economy. Usually, during global turmoil, the euro weakens, which benefits exporters by making their products cheaper and more competitive. But if the euro continues to appreciate, imported goods become cheaper, which could exacerbate deflationary pressures. Goldman Sachs economists calculated that since early March, the euro has appreciated by 5% against major trading partner currencies, which could lead to an annual decrease in inflation of about 0.2 percentage points over the next two years.

So, the European Central Bank faces a dilemma. Can the euro still rise? Based on current trends, there is indeed room for further appreciation. Brian Mangwiro, portfolio manager at Bahrain Bank, said that if EUR/USD rises above 1.20, the ECB would have to cut its benchmark interest rate from the current 2.25% to below 1.5% by the end of the year.

ECB President Christine Lagarde has already publicly stated that euro appreciation is "counterintuitive," and U.S. Treasury Secretary Janet Yellen also commented, predicting that the ECB will further cut rates to curb the euro's strength. Mathieu Savary, chief European strategist at BCA Research, even said that if the euro rises from 1.01 to 1.20 dollars within six months, it would be a big problem.

Interestingly, there are also voices within the ECB warning about this. Chief economist Philip Lane has warned that euro appreciation is dragging down the economic recovery, and Governing Council member Olli Rehn has expressed concerns about downside risks to inflation, emphasizing that the euro's value is crucial when assessing policy.

The current question is, how much does the ECB need to cut rates to stabilize the situation? Sam Zief, head of FX strategy at J.P. Morgan Private Bank, pointed out that the euro's strength will further motivate officials to be more aggressive in cutting rates. Investors are waiting to see the ECB's June forecast update for clues on the rate cut pace in the coming months.

Interestingly, the ECB is not the only central bank facing this issue. The Swiss franc is also soaring, and the Swiss National Bank might need to lower interest rates from 0.5% to negative territory later this year. However, Kirstine Kundby-Nielsen, a currency strategist at Danske Bank, believes the ECB has more room to cut than the Swiss, as they have more space to ease policy. She predicts that by the end of the year, EUR/USD will reach 1.21.

In short, whether the euro can continue to rise largely depends on the ECB's rate cut decisions. If they are truly worried, there is still enough room to loosen monetary policy and push the euro lower. But in the short term, the strong trend of the euro seems difficult to reverse.