NEW YORK ( TheStreet ) -- Entering the week, there were noticeable headwinds for the euro. The single currency had suffered from a nasty selloff the previous week, reaching fresh multi-month lows vs. the Japanese Yen, British Pound, U.S. Dollar and Canadian Dollar. It also stood dangerously close to the all-time low vs. the Swiss Franc and near a multi-decade low vs. the Australian Dollar. Although sentiment toward the euro was extremely bearish, there were indeed tentative technical signs of a bottom.

Despite recent eurozone peripheral debt worries, the two-year yield differential between the U.S. and EU had continued to widen. Even while the euro depreciated markedly, the spread continued to work in Europe's favor. By Monday, the yield differential had expanded beyond 30 basis points for the first time in weeks, offering scope for the highly correlated EUR/USD to recover.

During the same stretch, the trade-weighted Euro Index (EXY) had begun to show tentative signs of forming a meaningful bottom as well. In fact, while price-action of the currency index was in the midst of collapsing, the corresponding daily RSI indicator had already begun to shift upwards. This positive divergence managed to correctly hint of the completion of a five-wave decline that begun back in early November.

The most recent CFTC Commitment of Traders report pointed out that speculators were roughly 24,000 contracts net short. Although, last week's tally is far from a record low, widening eurozone peripheral credit spreads had demonstrated that sentiment toward the single currency was near an extreme low. As the new week commenced, however, it was evident that the euro was at least due to consolidate recent losses.

Monday's price-action was considered to be optimistic, especially compared to the prior three-day thrashing. The EUR/USD managed to form a small two-day base that day, while the U.S. Dollar Index falsely broke above the previous day's peak. The euro was also able to maintain recent support vs. the Swiss currency.

But by Tuesday, it still was still unclear whether the euro would manage to hold up ahead the important Portuguese debt auction. It wasn't until the neighboring British Pound began showing signs of breaking-out to the topside that very day. Despite looming headline risk in Europe, the GBP/USD managed to close above key trendline resistance. The cable, which often serves as a leading indicator for the euro, had now laid the groundwork for a meaningful rally.