The European Commission stated that the EU will contract for a second year in a row in 2013, with the Eurozone economy expected to contract by 0.3% this year while unemployment will rise to 12.2%. Just in November of 2012 the European Commission predicted a 0.1% growth rate for the Eurozone and unemployment at 11.8%.

This is just the latest sign that the situation continues to worsen and that there is no light at the end of the tunnel right now. Constant high unemployment will drag down the economy in 2014 and 2015 as well while the Eurozone banking sector struggles for survival and austerity measures in several Eurozone as well as other EU economies extinguishes economic activity.

Expectation for the EU economy in 2013 is a 0.1% expansion. In other words the remaining 10 non-Euro members of the EU will make up for the lack of economic performance and the EU will eke out a fractional gain. This raises several questions about why those 10 countries should join the EU as it seems in their worst interest. It also re-invites the discussion of a dual Euro system which is the only viable form of Euro existence forward.

Where will the Euro Exchange Rate go?

The Euro-U.S. Dollar Exchange Rate (EURUSD) should contract from current levels and forex traders need to look out for the key 1.3090 level which corresponds with the 38.2 Fibonacci retracement level. The EURUSD may correct all the way down to its 50.0 Fibonacci retracement level before finding support.

The reason for the contraction is much weaker than expected economic output from the Eurozone and temporary relieve from QE3 which the U.S. Federal Reserve hinted at its latest meeting. The USD gathered some strength which should be short-lived after date shows much weaker growth rates and economic activity in the U.S.

In Addition the Fed may openly object continued weak U.S. Dollar policy, but is already at work on QE4 as a drop in employment growth and further economic contraction will force the U.S. economy back into a recession. In general the trend for the U.S. Dollar will be down in 2013.

The EURUSD exchange rate should average above the 1.3000 level 2013, not due to Euro strength but rather due to USD weakness. We believe the USD will be much weaker than the Euro which should put a floor under downside potential for the EURUSD pair. We may see a range between 1.2800 and 1.3800 throughout the rest of the year and forex traders should expect volatility to increase with every bit of economic and monetary data out of the Eurozone as well as the U.S.