This might work for you:
# create multiline test data
cat <<\! >/tmp/a
> this
> this { this needs
> changing to
> that } that
> that
> !
sed '/{/!b;:a;/}/!{$q;N;ba};h;s/[^{]*{//;s/}.*//;s/this\|that/\U&/g;x;G;s/{[^}]*}\([^\n]*\)\n\(.*\)/{\2}\1/' /tmp/a
this
this { THIS needs
changing to
THAT } that
that
# convert multiline test data to a single line
tr '\n' ' ' </tmp/a >/tmp/b
sed '/{/!b;:a;/}/!{$q;N;ba};h;s/[^{]*{//;s/}.*//;s/this\|that/\U&/g;x;G;s/{[^}]*}\([^\n]*\)\n\(.*\)/{\2}\1/' /tmp/b
this this { THIS needs changing to THAT } that that
Explanation:
/{/!b;:a;/}/!{$q;N;ba}
h
s/[^{]*{//;s/}.*//
s/this\|that/\U&/g
x;G
s/{[^}]*}\([^\n]*\)\n\(.*\)/{\2}\1/
EDIT:
A more complicated answer which I think caters for more than one block per line.
# slurp file into pattern space (PS)
:a
$! {
N
ba
}
# check for presence of \v if so quit with exit value 1
/\v/q1
# replace original newlines with \v's
y/\n/\v/
# append a newline to PS as a delimiter
G
# copy PS to hold space (HS)
h
# starting from right to left delete everything but blocks
:b
s/\(.*\)\({.*}\).*\n/\1\n\2/
tb
# delete any non-block details form the start of the file
s/.*\n//
# PS contains only block details
# do any block processing here e.g. uppercase this and that
s/th\(is\|at\)/\U&/g
# append ps to hs
H
# swap to HS
x
# replace each original block with its processed one from right to left
:c
s/\(.*\){.*}\(.*\)\n\n\(.*\)\({.*}\)/\1\n\n\4\2\3/
tc
# delete newlines
s/\n//g
# restore original newlines
y/\v/\n/
# done!
N.B. This uses GNU specific options but could be tweaked to work with generic sed's.