Fluctuations in the exchange rate can affect how we invest, how costly imported goods are and the level of travel money we can afford. The pound-to-euro exchange rate is typically in favour of the pound, but is this set to continue?
We take a look at why the pound is stronger than the euro and what this means for you.
Why is the pound stronger than the euro?
Currency exchange rates rely on a lot of factors. So, the pound-to-euro ratio is dictated by supply and demand, inflation and economic policies.
Interest rates play a big role in the strength of a currency. High interest rates support a currency because foreigners can achieve higher returns investing in that country.
However, interest rates have been kept at record lows because of the coronavirus pandemic. What is working in favour of the pound is that the Bank of England’s interest rates are marginally higher than those of the European Central Bank (ECB) at the time of writing.
Also, the expectation is that the Bank of England will increase the base rate at some time in 2022. This is earlier than any anticipated rise in rates by the ECB.
Economic policies surrounding inflation and the stability of a government can also contribute to fluctuations in the pound-to-euro exchange rate. So while the pound is still slightly ahead of the euro, the recent decision to maintain the pound’s quantitative easing levels meant it dropped from an even more favourable position.
Yet, if you take a longer-term view, the pound has been stronger than the euro for a decent period of time. And there is optimism for the near-term future.
Why does it matter?
The pound-to-euro exchange rate dictates a number of areas in our financial lives.
Some may invest in the FX market. So any fluctuation in the value of the pound against the euro could have an impact on their returns.
For most, it impacts the value of imports and exports. If the pound is strong, imports are cheaper but exports are more expensive.
It also has an impact on travel money for foreign holidays – though not that many of us are taking those at the moment. You may be tempted to purchase your travel money now, to harness the pound’s strength. But it is probably still worth waiting until there is more information on travel this summer. You don’t want your cash tied up in foreign currency unnecessarily.
How can I get the best deal on travel money?
While the pound-to-euro exchange rate continually fluctuates, the forecast for the moment is that the pound will remain stronger than the euro.
If we are able to holiday in Europe this summer, here are some tips for buying travel money:
- Buy your money in advance: You can usually get a better deal if you don’t leave it until the last minute and have to resort to the bureau de change at the airport, train station or ferry port.
- Consider a currency card: Prepaid cards like Revolut allow you to effortlessly exchange money. And then you can use the card when you are abroad.
- Shop around for the best deal: While there is a general market pound-to-euro exchange rate, different outlets will have different deals and fees.
- Buy travel money using your debit card: if you use your credit card, you could incur extra charges that you won’t face when using a debit card.