If you’ve ever converted £500 at an airport and received far fewer euros than the rate on your phone suggested, you’ve met the spread. Exchange rates aren’t a single number: there is a wholesale rate that banks trade at, and then the retail rate you are offered, which includes the provider’s margin and sometimes extra fees. This guide explains how rates are set, how to spot the real cost of a conversion, and practical ways to pay less. Our currency converter shows live mid-market rates for comparison.
General information only, not financial advice. Rates move constantly; always check the final amount before confirming a transaction.
How exchange rates are set
Most major currencies, including the pound, euro, US dollar and yen, float: their value is set by supply and demand on the foreign exchange (forex) market, the largest financial market in the world. Factors that move rates include:
- Interest rates: higher rates set by a central bank (the Bank of England, the Federal Reserve, the ECB) tend to attract investment and strengthen the currency.
- Inflation: persistently higher inflation usually weakens a currency over time.
- Economic data and politics: growth figures, trade balances, elections and budgets.
- Risk sentiment: in uncertain times, money often flows into perceived safe havens such as the US dollar and Swiss franc.
Some currencies are pegged to another. The Saudi riyal is fixed at 3.75 per US dollar and the UAE dirham at 3.6725 per dollar, maintained by their central banks. The Hong Kong dollar trades within a narrow band against the US dollar.
Reference rates
Central banks publish daily reference rates. The ECB publishes euro reference rates at around 16:00 CET each working day, explicitly for information purposes only. These rates are useful for accounting, contracts and statistics, but you cannot trade at them.
Mid-market, buy and sell rates
At any moment, dealers quote two prices:
- Bid (buy): the price at which they buy a currency from you.
- Ask (sell): the price at which they sell it to you.
- Mid-market rate: the midpoint between the two.
Retail providers add a margin on top of the wholesale spread. Example, with a mid-market rate of £1 = €1.1500:
| Provider | Rate offered to you | € for £500 | Cost vs mid-market |
|---|---|---|---|
| Mid-market (reference) | 1.1500 | €575.00 | — |
| Low-fee card or app | 1.1460 | €573.00 | about 0.3% |
| High-street bank transfer | 1.1150 | €557.50 | about 3% |
| Airport bureau | 1.0500 | €525.00 | about 8.7% |
The hidden margin in the rate is often bigger than any visible fee. A bureau advertising “0% commission” may simply be building its profit into a poor rate.
How to calculate the real cost
cost % = (mid-market rate − your rate) ÷ mid-market rate × 100For the airport example: (1.1500 − 1.0500) ÷ 1.1500 × 100 ≈ 8.7%.
Cards abroad
- Non-sterling (foreign) transaction fees: many UK debit and credit cards charge around 3% on spending abroad, sometimes plus a fixed fee for ATM withdrawals. US cards often charge a similar foreign transaction fee.
- Travel-friendly cards: some banks, credit cards and app-based accounts charge no foreign transaction fee and use the card network’s rate (Visa or Mastercard), which is usually close to the mid-market rate.
- ATM fees: the local ATM operator may charge its own fee, displayed on screen before you confirm.
- Credit cards and cash: withdrawing cash on a credit card is treated as a cash advance, with fees and interest from day one.
Dynamic currency conversion (DCC)
When a card terminal, ATM or online checkout asks whether you want to pay in your home currency, that’s DCC. It feels convenient because you see a familiar figure, but the merchant’s provider sets the rate, often with a markup of several percent. Choose the local currency and let your card network convert it.
Sending money abroad
- Compare the total amount received, not just the fee. Providers must show the exchange rate and fees before you pay.
- Bank transfers through SWIFT can involve intermediary fees; check whether the recipient will receive the full amount (“OUR” vs “SHA” charges).
- For euro payments within the SEPA area, transfers are typically cheap and fast. You need the recipient’s IBAN; see our IBAN guide.
- For large amounts (for example a property deposit), specialist currency brokers can offer forward contracts to fix a rate in advance.
Practical tips for travellers
- Check the mid-market rate before you exchange, so you know what “good” looks like.
- Order travel money online in advance rather than at the airport.
- Carry a card with no foreign transaction fee as your main payment method.
- Always pay in the local currency.
- Withdraw larger amounts less often if your card charges per withdrawal, but don’t carry more cash than you need.
- Exchange leftover coins before leaving, or keep them for your next trip; bureaux rarely buy back coins.
Exchange rates and business
If you invoice in foreign currency, rate swings can wipe out your margin. Common approaches:
- Invoice in your own currency when you have the bargaining power.
- Agree which rate applies (for example, the ECB reference rate on the invoice date).
- Hold a multi-currency account to avoid converting every payment.
- For VAT invoices in a foreign currency, HMRC accepts several rate sources, including its own monthly published rates; our VAT guide covers the VAT side.
Common mistakes
- Judging providers by “no commission” claims rather than the rate.
- Accepting dynamic currency conversion.
- Using a credit card for cash withdrawals abroad.
- Exchanging large sums at airports or hotels.
- Assuming the rate quoted in the morning still applies in the afternoon.
Checklist
- Look up the mid-market rate first.
- Calculate the percentage margin of any offer.
- Use a low-fee card, pay in local currency, avoid DCC.
- For transfers, compare the amount the recipient receives.
- For business, agree in advance which reference rate applies.