The Euro surged to 1.3105 for the first time since May shortly after U.S. equity markets opened, but was unable to hold this level as stocks corrected sharply during the trading session. The subsequent break triggered volatile moves throughout the session with the market retracing inside the 1.3105 to 1.3059 range several times.

The EUR USD began to break out to the upside last night buoyed by strong European earnings reports and the dim outlook for the U.S. economy. Some traders are factoring in the possibility that the European Central Bank may be in a position to raise its benchmark interest rate before the Fed acts upon the U.S. borrowing rate.

Technically the Euro is in a strong uptrend. The breakout above the last swing top at 1.3028 reaffirmed the trend as well as the crossing of the .618 retracement level at 1.2998. In order to sustain this rally, the currency has to close above 1.2998.

The British Pound traded higher but barely held on to earlier gains following a test of a major 50% level at 1.5635. Slowing the Sterling’s upside momentum today is a U.K. housing price report which showed that home values fell in July for the first time in five months. Tighter lending conditions and concerns that government spending cuts will slow economic growth were to blame for the drop.

Last week it was reported that the U.K. economy grew more than expected during the Second Quarter but that was before the implementation of new government austerity measures. Concerns that new taxes and spending cuts will hurt the economy could be the factors which contribute to the start of a short-term decline. Technically, investors should begin to watch for a technical closing price reversal top to signal the end of the current rally. At a time today, the Sterling was close to forming a reversal top, but bargain hunters were buying aggressively on the dips.

The New Zealand Dollar traded weaker versus the U.S. Dollar after the Reserve Bank of New Zealand hiked its key lending rate by 25 basis points to 3.00%. Although this hike was expected, the main reason behind the weakness is the comment from RBNZ Governor Alan Bollard. The central bank Governor stated after the report that the “pace and extent” of future increases would be more moderate than earlier projected. Investors read this a sign that the central bank will refrain from an additional rate hike at its next meeting on September 15.

Technically the Kiwi reached its closing price reversal top objective at .7211. A normal reaction to this pattern is a 2 to 3 day decline of 50% of the last swing up. Further weakness will be indicated if .7211 fails to hold as support. Weakness in U.S. equities may trigger a further decline on Friday.

Tomorrow the U.S. will release its preliminary Second-Quarter GDP Data. Investors are looking for this report to reveal a softening economy. Analysts expect U.S. GDP slowed last quarter to an annual rate of 2.5% from 2.7% in the first. A number showing a greater than expected decrease could drive equity and commodity markets sharply lower, setting off the possibility of a major flight to quality rally in the Dollar. Given the recent slew of weak economic data and dim outlook for the economy by Fed Chairman Bernanke, this is one report that should be watched carefully.