The dollar could be set to rally against the euro despite improved market sentiment around the European sovereign debt crisis, Robin Griffiths, technical strategist at Cazenove Capital told CNBC Monday.
The euro’s performance against the dollar shows markets have confidence that Europe will resolve the sovereign debt issues in the peripheral countries, Griffiths said.
“At the moment (the euro/dollar) has been on an uptrend, so throughout the entire period when the world is worrying about Greece, Spain, Portugal and everything, it’s in fact the euro that has been going steadily up against the dollar. Clearly the issue that would really make the euro come down is not worries about Greece,” Griffiths explained.
“The market's assuming that politicians will one way or another eventually sort that out and the euro holds together, but if weak markets break into the cyclical bear, then that will be the risk-off story and the dollar will have a substantial rally at that point,” he added.
"That call will be more important than exactly how and when the Greek and Irish problems are sorted out."
Griffiths also warned that the FTSE 100 will need to rally soon after three weeks of declines for the London Stock Exchange.
“Ever since March 2009 we’ve been in a cyclical bull market, in the presence of a secular downtrend, so we were never going to go as high as we were 10 years ago. We’re back into 2008,” he said.
“What you can see is since January this year there’s clearly been resistance, every time it gets up to highs, it falls back. At the moment we’ve had the normal ‘Sell in May and go away’ fallback. We have not broken down absolutely, but if we don’t start rallying pretty soon, we will,” Griffiths warned.
Griffiths said commodity firms such as Antofagasta could help aid a rally for the FTSE, but it must happen soon.
“If you look at Western markets, the strong ones that have not broken down are Germany and America, Britain's then the one right on the cusp of will it or won't it? And all of the weaker ones, the so-called PIIGS markets, they are already clearly in their next cyclical bear market,” he said.
“If it's going to rally, it's got to do it very soon and we do normally get a mid-summer rally up until early August so we're coming into a period when it normally would have a rally,” he added.