Overnight manufacturing data from Europe surprised on the upside. The German manufacturing PMI read at 56.3, from 54.3 previously and above the consensus estimate of 54.6. The read for the Eurozone was 53.9, also well above the former and forecast numbers. In combination with a stronger GDP report earlier in the month, a picture of a stronger than expected economic recovery in Europe is emerging.

Naturally, this is supportive of the EUR. The potential trade long EUR/USD is made difficult by the FOMC meeting next week. Any further stimulus tapering could see the USD strengthen immediately. Which central bank is actively jawboning its currency lower? Hello, Reserve Bank of Australia.

Last night, EUR/AUD broke out:

20140124 euraud

Traders may check the weekly chart to confirm the long term up trend in EUR/AUD. The MACD has crossed bullishly, and the pair is sitting just above the previous high. This offers a potentially attractive entry and stop loss combination, buying at current prices around 1.5608, with a stop loss below 1.5596 – something like 1.5578.

Target levels are a little more problematic, as the pair has not traded at these levels since 2010. Fibonacci extensions and Elliot wave counts may come into play. However, these estimates are likely to be just as useful as the traders’ rough rule of thumb of 3% - 5% break outs in currencies, or 450 – 750 pips. If the trade moves 45 points into profit, one plan is to  set a trailing stop loss and let the market decide how far to ride the initial move.

A stop out is  not a concern, as traders may then turn to shorter time frame charts to identify re-entry points, trading in and out as if the pair rises.