By Patrick Graham

LONDON (Reuters) - Many stars would seem to be aligned for further euro appreciation against the dollar, but there is an absence of properly bullish forecasts.

This owes more to European Central Bank sensitivities than market dynamics or economic drivers.

Forward-looking pricing from the options market and investor positioning against the dollar are the strongest in years and show a head of steam building for a significant euro rally.

Yet strategists plotting the currency's path over the coming year are far more cautious.

Of the 65 economists and bank strategists polled by Reuters recently, only one -- HSBC -- was prepared to predict the euro would reach $1.20 this year, just five percent higher than it is now, while the median in the poll was $1.13.

That contrasts starkly with the euro's surge to close to $1.15 since a speech two weeks ago by European Central Bank President Mario Draghi that itself spurred an almost 2.5 percent jump.

Many analysts say the disconnect is down to nerves over the ECB's reaction to any further strength.

"They (the ECB) are sensitive to financial conditions and if it is just the currency going up by 2-3 percent then I don't think they have a problem," said Richard Benson, co-head of portfolio investment with Millennium Global in London.

"But above $1.20 that is clearly another story. If it coincides with European equity weakness and higher spreads to the periphery then that is a bigger issue."

The United States' convincing upturn since 2011 has benefitted the dollar, weakened the euro and aided the euro zone's broader export-led bounce.

So how much currency appreciation the ECB will be willing to tolerate during a likely slow plod back to policy normality is now the biggest question facing forecasters.

In trade-weighted terms the euro has gained 7.6 percent in the past 18 months and 3 percent in the past 12, but the surge in the last quarter alone is more than 4 percent, taking it to its highest since the launch of quantitative easing in early 2015.

State Street's European head of macro strategy Tim Graf says that figure is not worrying yet, but that a similar rise in the months ahead would raise the stakes.

"If you look at any chart of REER (real effective exchange rate), it still looks super cheap. They probably are even happy with this bit of strength because it shows the economy is improving," he said.

"If it were to double, maybe they would have something to thing about."

HAWK EYES

At the heart of the market thinking is the concern which the ECB itself has signalled about the euro.

It took less than 24 hours for officials at the bank to step in and try to moderate Draghi's message on June 27 with background briefings; most analysts read that as a response to the scale of the surge of the euro.

Although the ECB has no exchange rate target, sources close to discussions say that board members closely watch market developments, particularly during periods of turmoil, like Draghi’s speech.

In 2014 Draghi said that every 10 percent of gains for the currency was liable to knock 0.4-0.5 percentage points off headline inflation.

His language on the impact when the euro was falling dramatically in 2015 was more vague and ECB staff projections currently provide for an alternative scenario where the euro is weaker over the next two years, not stronger.

While any big euro firming is watched with concern, the sources also say that policymakers are focussed more on bond yields than the currency, viewing the bank’s asset purchase programme as the key policy transmission tool and worried any blowout in yields could unravel its work.

Executive Board member Benoit Coeure recently argued that currency depreciation during the early phase of the bank’s 2.3 trillion euro asset buying scheme was a side-effect and not the objective.

"Far from 'beggaring its neighbours', monetary policy easing by the ECB has added to global demand and thereby stabilised the global economy, in particular after the euro area had been a major drag on global growth for many years," Coeure said.

It is just that markets don't quite believe it.

"It is an issue for the ECB. In the past when the euro was where it is today, we have seen them intervening to talk the currency down," said Athanasios Vamvakidis, head of G10 FX strategy with Bank of America Merrill Lynch in London.

"It is above what they are assuming in their inflation forecast. If you are at $1.20 you at an equilibrium which is supposed to happen when policy has been normalised. So taking the business cycle into acount, the euro would be overvalued at $1.20."

(Additional reporting by Balazs Koranyi in FRANKFURT and Ritvik Carvalho in LONDON Editing by Jeremy Gaunt.)