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I will have to pay a tuition fee of 6000 British Pound by the end of August and I own Euros. How can I decide if I should convert my currency now or if I should wait a few months. I have absolutely no clue in this area.

I am not asking for a binary answer a la "do it now" vs. "wait until fall", although that is appreciated. Rather I would like to know on what rationale such a decision should be based. When you were in my position, what information would tell you how the euro/gbp will likely perform?

I am aware that only educated guesses are possible. However I don't even know what I should read to educate myself about this.

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My usual advice is to monitor longer term trends. For example, I convert Euros to US Dollars or vice versa on a somewhat regular basis. I know that for the last few years, the typical annual cycle has been to vary between an exchange rate of $1.22 per 1 euro to $1.35+ per 1 euro. It's taken on average 6 to 8 months to cycle between the highs and lows. If the exchange rate is on the higher side, I try to wait for it to cycle back down to at least the mid point.

The situation right now is more complicated than usual. The attitude of the Greek government and the new ECB policy of buying government bonds make it difficult to predict how the value of the Euro will evolve. The Euro is quite low right now, but it has been fairly stable the last few days in spite of the large uncertainty around Greece. One strategy could be to wait a month or two to see how the Greek situation plays out while assuming that the Euro won't go much lower than it is today even if things look bad. If it looks like the crisis will deepen, you might just convert immediately and accept a poor exchange rate to avoid uncertainty. If it looks like the Greek situation will resolve amicably, you might wait until later in the summer to see if the Euro recovers.

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This is in general a hard problem. Many people (I get around 5 of these e-mails from bank professionals every morning) will tell you their guesses on which direction currencies are moving. On this up/down question even the professionals are right embarrassingly close to half the time.

If you want what the market as a whole thinks (rather than just the couple random internet folk) you can look at forward rates. Now these are tough to read, but if you look at the 6M point you can see that the forward rate is ~30 points which is a fancy way of saying 0.0030 GBP. This means that if the if the bank is willing to give you 0.7230 GBP for your EUR today the are also willing to enter in a contract today to exchange 0.7230 + 0.0030 = 0.7260 GBP for you EUR on a date six months from now.

So, though 30 points is tiny, you could look at the above and say you should wait.

However, even this is not a great way to look at it. It seems unsatisfying I understand, but your best bet for saving yourself some money is to put this effort into finding a good institution with small spreads to exchange your money with. And the real best reason to wait is if there is even a smallest chance that you won't have to exchange the money at all then you will save money by not having to exchange your money back to EUR later.

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  • note the 30 points was at the time of writing and does change.
    – rhaskett
    Commented Mar 20, 2015 at 18:44
  • Does '0.003 GBP forward rate' mean the bank thinks, that the exchange rate will only change by this tiny amount within 6 months? I ask, because they certainly have a lot of expertise behind such an opinion.
    – icehawk
    Commented Mar 21, 2015 at 18:58
  • Close, but not exactly. Think of it as the average "thought" of all the traders in the market including the banks and you too when you decide whether to trade your EUR today or in 6 months. They do have expertise, but it is worth noting that predicting currency prices is much less of a "science" than predicting the value of bonds or even stocks.
    – rhaskett
    Commented Mar 22, 2015 at 22:50
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The way I would look at it is as follows. You currently know that you will need to pay 6000 GBP, and presumably you own EUR. This means that you are short GBP/EUR: if GBP becomes cheaper in EUR terms, you profit, otherwise you lose. Essentially, you are speculating in EUR/GBP. If you want to be a speculator, that is fine, but of all things, would you have chosen to speculate specifically in EUR/GBP? For me, that answer would most likely be "no", especially since, as you say, you have no particular expertise there. Just because I am going to school in the UK does not make me an FX speculator.

So what I would do is hedge my exposure immediately by buying the GBP (or forwards, etc). Then if I still want to use that GBP to take a position on something (because I felt I was better informed than the market in some area) before paying the tuition, that is fine. But then at least I am making an active decision to speculate rather than doing it by default because of my decision to go to school in the UK.

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