Because मेरे is the oblique form. It is oblique because a postposition is used in this sentence (में).

Haha, yeah it is a bit odd for English speakers. Although हो रहा है is more like 'is happening'. रहा is just to make the continuous form here, and doesn't have to do with रहना (to live) per se. I think मेरे सिर में दर्द है, or even मेरे पास एक सिरदर्द है would also both be a similar meaning (although a mother tongue hindi speaker would have to confirm).