Summer holiday: should you buy currency now?
It’s been a volatile period for the pound since the EU referendum vote in June last year. Just before the Brexit outcome, sterling strengthened as the markets predicted remain, but it fell sharply in the aftermath.
Currently the pound has fallen around 12% against the euro and it’s lost nearly a fifth of its value against the dollar, falling 18% from the pre-referendum highs.
It has started to rise off the back of strong economic data such as employment, GDP figures and record highs of the FTSE 100.
So if you’re planning to go on summer holiday, should you buy your currency now or wait until closer to the time?
Foreign exchange specialist Caxton FX says currency movements are more typically swayed by economic data and political activity rather than supply and demand of the holiday season in Britain. But with the parliamentary summer recess, political activity is likely to slow, which it says can sometimes provide more certainty for traders, and consequently strengthen the pound.
“But with the Brexit negotiations due to start soon, this shouldn’t be relied upon – there’s a significant chance of further volatility”, says Alexandra Russell-Oliver, a currency market analyst at Caxton FX.
Keeping track of currency movements
Caxton FX recommends checking the performance of the pound against your chosen currency, such as via Caxton and websites such as Xe.com and Oanda.com to keep track of exchange rates and the currency markets.
You can also Google a pairing such as ‘pound-euro’ to get the interbank rate – the spot rate or buy/sell rates that banks and other companies trade sterling at. Otherwise Bloomberg and Yahoo Finance can also give you data to compare currency and see historical charts.
Russell-Oliver says: “These charts give you a visual representation of how the rate has performed over the past day, month, etc. Different charts will provide more or less detail, so find one that suits your needs.”
On the news earlier this week that parliament passed the Brexit Bill, the pound dipped. The next significant event to watch is the triggering of Article 50 due by the end of the month, which will undoubtedly affect the value of the pound.
Prepaid card or hedge your bets?
On Wednesday night, the dollar weakened after the US Federal Reserve meeting, pushing the sterling-dollar rate to around its highest levels since the start of the month.
On Thursday afternoon, the pound jumped after a member of the Bank of England’s Monetary Policy Committee voted in favour of raising interest rates.
In the case of a spike in the value of the pound, a prepaid currency card could be a good option for summer holidaymakers.
The prepaid currency cards allow users to pre-load currency on to it to lock in the exchange rate on the day of the transaction, which good be good if the pound rises against other currencies.
“Buying your currency in advance also means you’ll know exactly how much you have to spend while you’re away”, Russell-Oliver adds.
See YourMoney.com’s Prepaid cards: what are they and are they right for your holiday for more information.
However, in addition to considering a prepaid currency cards, Caxton FX says it’s “worth hedging your bets”.
Russell-Oliver explains: “That means purchasing half your currency now, and half later. This allows you to benefit from the better exchange rate whatever direction the rate moves in next. Over the coming months, the triggering of Article 50 and initial Brexit negotiations could see further pound weakness. Broadly speaking, there is still significant uncertainty about what Brexit will look like, and this uncertainty is a risk for the pound.”
What about using debit and credit cards abroad?
Using your normal debit and credit cards abroad can be very expensive, unless you get a specialist overseas card for holiday spending.
This is because debit and credit cards often charge two types of fees on foreign exchange: ATM/usage charges, and the costs in the exchange rate. This can add between 3% and 10% on top of the transaction cost.
If you do have to pay with your local debit or credit card, one way to minimise costs is to always opt to pay in the local currency.
Russell-Oliver says: “This is called Dynamic Currency Conversion (DCC). If a merchant gives you an option to pay in the local currency or GBP (sterling), then always choose the local currency e.g. euros or dollars. Otherwise, the merchant converts your payment at their exchange rate. Remember to check the screen before authorising transactions too. If the value is shown in pounds – ask that it is changed.”
Any other tips?
You should never use the airport bureaux. “They have a captive audience at the airport, so can get away with charging a fortune. In some cases, offering close to £1 for €1 so you’ll get far more for your money by planning ahead.