Understanding Currency Exchange
Whether you're planning a holiday, sending money abroad, or making international purchases, understanding how currency exchange works helps you get more value for your money. The British pound sterling (GBP) is one of the world's most traded currencies, and its value constantly fluctuates against other currencies.
This guide explains how exchange rates work, how to convert currencies, and most importantly, how to avoid paying more than you should.
How Currency Conversion Works
Amount in Target Currency = Amount in GBP × Exchange Rate
Amount in GBP = Amount in Foreign Currency ÷ Exchange Rate
Example: Converting £500 to Euros
If the exchange rate is 1 GBP = 1.17 EUR:
£500 × 1.17 = €585
Your £500 would give you €585
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Common GBP Exchange Rates
Here are typical exchange rate ranges for popular currencies (rates fluctuate daily):
| Currency | Code | Typical Range (per £1) | Common Usage |
|---|---|---|---|
| Euro | EUR | 1.10 - 1.20 | Europe travel |
| US Dollar | USD | 1.20 - 1.35 | USA, online shopping |
| Australian Dollar | AUD | 1.85 - 2.00 | Australia travel |
| Canadian Dollar | CAD | 1.65 - 1.80 | Canada travel |
| Swiss Franc | CHF | 1.05 - 1.15 | Switzerland travel |
| Japanese Yen | JPY | 180 - 200 | Japan travel |
| Turkish Lira | TRY | 35 - 45 | Turkey holidays |
| Thai Baht | THB | 42 - 48 | Thailand holidays |
| UAE Dirham | AED | 4.50 - 5.00 | Dubai travel |
| Indian Rupee | INR | 100 - 110 | India, remittances |
These are indicative ranges and change constantly. Always check current rates before exchanging.
Understanding Exchange Rate Types
Mid-Market Rate (Interbank Rate)
This is the "real" exchange rate – the midpoint between buy and sell rates used by banks trading with each other. You'll rarely get this rate as a consumer, but it's the benchmark to compare against.
Buy Rate vs Sell Rate
Exchange providers make money on the "spread" between these rates:
- Buy rate: What they'll pay you for foreign currency
- Sell rate: What they charge you for foreign currency
The difference can be 2-5% or more, which is effectively a hidden fee.
Tourist Rate
The rate offered at airports, hotels, and tourist areas. Typically 5-10% worse than the mid-market rate. Avoid if possible.
Where to Exchange Currency
| Option | Pros | Cons | Rating |
|---|---|---|---|
| Online currency services | Best rates, convenient | Need to plan ahead | |
| Travel money cards | Good rates, secure | Setup required | |
| High street bureaux | Immediate, compare rates | Rates vary widely | |
| Banks | Trustworthy | Often poor rates | |
| Post Office | Convenient locations | Mid-range rates | |
| Airport exchange | Last-minute option | Worst rates | |
| Hotel exchange | Convenient | Very poor rates |
Travel Money Cards
Prepaid travel cards have revolutionised currency exchange for UK travellers:
How They Work
- Load pounds onto the card via app or bank transfer
- Convert to foreign currencies at near-market rates
- Spend abroad like a normal debit card
- Withdraw cash from ATMs (usually with a small fee)
Popular UK Travel Money Cards
- Wise (formerly TransferWise): Near mid-market rates, low fees
- Revolut: Free exchanges up to monthly limits
- Starling Bank: No fees on card spending abroad
- Monzo: No fees, but uses Mastercard rate
Cost Comparison Example: £1,000 to Euros
| Method | Rate | Euros Received | Difference |
|---|---|---|---|
| Mid-market rate | 1.17 | €1,170 | Benchmark |
| Travel card | 1.165 | €1,165 | -€5 |
| Online bureau | 1.14 | €1,140 | -€30 |
| Airport | 1.05 | €1,050 | -€120 |
Factors Affecting Exchange Rates
Economic Indicators
- Interest rates: Higher UK rates often strengthen the pound
- Inflation: Lower inflation supports currency value
- GDP growth: Strong economy = stronger currency
- Employment data: Job market health affects confidence
Political Events
- General elections and political stability
- Trade agreements and international relations
- Government policies on spending and taxation
Global Factors
- Oil prices (UK is a net importer)
- Global economic conditions
- Risk appetite in financial markets
- US Federal Reserve decisions
Tips for Getting Better Rates
- Compare rates online: Check multiple providers before exchanging
- Order in advance: Online ordering typically offers better rates than walk-in
- Avoid airport exchanges: Only for absolute emergencies
- Use travel money cards: Often the best rates for spending abroad
- Watch for "0% commission": Hidden in a worse exchange rate
- Check total cost: Calculate what you actually receive, not just the headline rate
- Time your exchange: Rates fluctuate; monitor trends for large amounts
- Pay in local currency: Always choose to pay in the local currency abroad, not GBP
Sending Money Abroad
For international transfers, high street banks are typically the most expensive option:
| Provider Type | Typical Fees | Exchange Rate Markup |
|---|---|---|
| High street banks | £15-30 | 3-5% |
| PayPal | Variable | 3-4% |
| Western Union | Variable | 2-4% |
| Specialist services (Wise, OFX) | £0-5 | 0.3-1% |
Worked Examples
Example 1: Holiday Spending Money
Need: €1,500 for a family holiday to Spain
Mid-market rate: 1 GBP = 1.17 EUR
Amount needed in GBP: €1,500 ÷ 1.17 = £1,282.05
Airport rate (1.05): Would need £1,428.57 (-£146.52)
Travel card (1.165): Would need £1,287.55 (-£5.50)
Saving with travel card: £141 compared to airport
Example 2: Online Purchase in USD
Item price: $299 from a US website
Mid-market rate: 1 GBP = 1.27 USD
Best case (near mid-market): $299 ÷ 1.27 = £235.43
Typical credit card (3% fee): £235.43 × 1.03 = £242.49
Fee-free card: £235.43 (saves £7.06)
Example 3: Sending Money to Family
Amount to send: £2,000 to India (INR)
Mid-market rate: 1 GBP = 105 INR = ₹210,000
Bank transfer (4% markup + £25 fee): ₹193,200 received
Specialist service (0.5% markup + £3 fee): ₹208,845 received
Difference: ₹15,645 more (approx £149)
Frequently Asked Questions
What is the best way to exchange currency in the UK?
Compare rates online before exchanging. Travel money cards and online currency services typically offer better rates than airports or high street banks. Order online for collection or delivery to get closer to mid-market rates.
Should I exchange money before travelling?
Generally yes, ordering currency in advance online gives better rates. However, a travel money card with no foreign transaction fees can be even better, as you get near-market rates and avoid carrying large amounts of cash.
What affects exchange rates?
Exchange rates are influenced by interest rates, inflation, political stability, economic performance, trade balances, and market speculation. The pound sterling fluctuates based on UK economic news and global events.
What is the mid-market rate?
The mid-market rate is the midpoint between buy and sell rates on global currency markets. It's the 'real' exchange rate before any fees or markups. Compare this to rates offered to see how much you're paying in hidden fees.
Should I pay in pounds or local currency abroad?
Always pay in the local currency. When offered the choice (DCC), choosing pounds means accepting a poor exchange rate set by the merchant, typically 3-5% worse than your card's rate.
Convert currencies at the best rates
Try Our Free Currency Calculator →Currency Conversion for UK Businesses and Expatriates
Currency conversion is a daily necessity for the growing number of UK businesses engaged in international trade and the estimated 5.5 million British citizens living abroad. Since Brexit, UK businesses trading with EU countries face additional complexity in their currency management, as fluctuations in the GBP/EUR exchange rate can significantly affect profit margins on cross-border transactions. The Federation of Small Businesses (FSB) reports that approximately 20% of UK small businesses export goods or services, making currency risk management an essential business skill for British entrepreneurs.
For UK businesses regularly converting currencies, forward contracts and currency hedging strategies can provide budget certainty. A forward contract, available through FCA-regulated brokers such as OFX, Moneycorp, and Currencies Direct, allows businesses to lock in an exchange rate for a future date, protecting against adverse currency movements. Many UK importers and exporters use this approach to fix their costs when placing orders or invoicing overseas clients. The FCA regulates all currency exchange and payment service providers in the UK, ensuring that client funds are safeguarded in segregated accounts and that firms meet strict capital adequacy requirements.
UK expatriates face particular challenges with currency conversion, especially retirees receiving a State Pension paid into a foreign bank account. The Department for Work and Pensions (DWP) pays the State Pension in GBP, and the conversion to local currency is handled by the receiving bank, often at unfavourable rates. Specialist international payment services can offer significantly better rates than traditional banks, potentially saving expatriates hundreds of pounds per year. For UK nationals returning from abroad, understanding capital gains tax implications on foreign currency gains above the annual exempt amount is also important, as HMRC may tax profits arising from currency fluctuations on non-sterling assets.
Frequently Asked Questions About Currency Conversion
What is the cheapest way to send money abroad from the UK?
Do I need to declare foreign currency holdings to HMRC?
How does the Bank of England base rate affect currency conversion rates?
Post-Brexit Currency Considerations for UK Residents
Since the United Kingdom's departure from the European Union, currency conversion has become an even more significant consideration for British travellers, businesses, and consumers purchasing goods from EU-based retailers. The end of the UK's EU membership removed the protections of the EU's Cross-Border Payments Regulation, which had capped the fees that banks could charge for euro transactions within the Single Euro Payments Area (SEPA). UK banks are now free to set their own fees for euro transfers to and from EU countries, and several major high street banks have reintroduced or increased charges for cross-border payments that were previously free or low-cost under the regulation.
For UK businesses trading with EU suppliers and customers, the post-Brexit landscape has introduced additional currency management complexity. The requirement for customs declarations, potential tariff payments, and VAT adjustments at the border means that the total cost of cross-border transactions now extends well beyond the exchange rate itself. Many UK small and medium-sized enterprises (SMEs) have responded by opening euro-denominated accounts with FCA-regulated providers, allowing them to hold, receive, and pay in euros without repeated conversion costs. UK consumers shopping online from EU retailers should also be aware that dynamic currency conversion, where the merchant offers to charge in pounds rather than euros at the point of sale, almost always results in a worse exchange rate than allowing your UK bank or card provider to perform the conversion. Choosing to pay in the local currency and letting your bank handle the conversion remains the most cost-effective approach for UK residents making purchases from any foreign merchant.
James Mitchell, ACCA
Chartered Accountant & Former HMRC Advisor
James is a Chartered Certified Accountant (ACCA) specialising in UK personal taxation and financial planning. With over 12 years in practice and a background as a former HMRC compliance officer, he brings authoritative insight to complex tax topics.