Speculators drove the Euro higher on surging oil prices and talk that the ECB may raise interest rates once again to curb inflation.

Just one day after the Dollar posted a strong gain against the Euro and looked as if it was ready to start a new leg up on this rally, traders sold in a big way forcing the Dollar to retrace 50% of its gains since April 22.

With crude oil ready to overtake $130 per barrel and a story circulating that the ECB would raise rates once the global financial crisis was abated, shorts that have been slowing building their positions over the past month were forced to lighten up because of this dramatic shift in sentiment.

The major concern in the Euro Zone is the high cost of energy leading to runaway inflation. It was reported on Tuesday that producer price inflation accelerated at the fastest pace in almost two years. This news prompted an advisor to the German government to warn of a rise in interest rates.

The EUR/USD broke through the 50% retracement price from the April 22 top. This price was 1.5651. The market has to hold above this price to attract more buyers for a drive to the next retracement price at 1.5738.

Look for additional support at 1.5463. The upside target of this rally is 1.5809.

USD/JPY Falls as Higher Oil Weakens the Stock Market

USD/JPY traders sold Dollars to buy Yen as the U.S. stock market fell sharply on higher crude prices. Traders sensing financial uncertainty desired the safety of the Yen over the potential return of the stock market.

In other minor news, the Bank of Japan decided to leave interest rates at 0.50%.

Technically, the pair is in a range with two key tops at 105.43 and 105.71 and 102.56 the main bottom. A break through this price will turn the main trend down with downside targets of 101.61 and 100.72. Look for resistance at 104.30.