Spanish destinations such as Barcelona are likely to be popular with UK holidaymakers in 2012

European holiday destinations could be 2012’s big winners as tighter travel budgets and a strengthening sterling exchange rate against European currencies attract UK families back to resorts in the Med.

That’s the headline news from the sixth annual Post Office Travel Money ‘Holiday Money Report’, which reveals the best value hotspots overseas for UK holidaymakers. And although Sri Lanka takes the top spot for value, research suggests that holiday choice in 2012 will be based strictly on affordability rather than aspiration. Despite low resort costs, higher airfares will make it harder for long haul hotspots to compete with the Costas.

The Post Office ‘Holiday Money Report’, published by the UK's largest provider of travel money, reviews travel trends for the past 12 months and identifies holiday hotspots for 2012, based on exchange rate trends and resort costs.

Sri Lanka was by far the cheapest of 40 destinations surveyed by the Post Office for the report's ‘Worldwide Holiday Costs Barometer’, rising from fifth place in 2011. At £27.95 for eight items, including dinner for two with wine, a year-on-year fall of 31 per cent made the fast-growing family favourite 26 per cent cheaper than runner-up Spain.

However, resort prices in the Costa del Sol (£37.72) are now 40% lower than five years ago, when Post Office Travel Money conducted its first barometer, and the cheaper cost of travel to Spain will make it a compelling choice for bargain hunters. The argument will be strengthened by the rising value of the pound, which is up 6.4% against the euro in the past three months.

The report found that sterling is stronger against 29 of its major currencies than a year ago, which should help deflect the pain of higher package prices and rising resort costs in two-thirds of destinations featured in the barometer. The biggest rises were recorded in Kenya (+52%, £69.70) and Portugal (+39%, £45.58) - the latter falling from top spot in 2011 to seventh place this year.

Putting the Portugal price rise into context, resort costs in Italy are 95% higher (£89.03, up 21%) while Corfu in Greece (£71.73) is 57% more expensive than the Algarve. Cyprus was the only eurozone destination of seven surveyed to show a clear fall in resort costs – down 8% (£53.19).

Elsewhere in the eastern Med, Turkey, once regarded as one of Europe's cheapest destinations, could only achieve 17th place in the Worldwide Holiday Costs Barometer table – making it 60% more expensive than Spain.

Sarah Munro, Post Office Head of Travel Money, said: “Given that sterling is worth around 20% more than a year ago against the Turkish lira, we expected to see a lower barometer cost for Turkey, especially as the country had a disappointing 2011. However, we were surprised to find that local costs have actually risen by 21% and it is only the strong sterling exchange rate that is masking that increase.

“It will be interesting to see how Turkish resorts respond to the challenge presented by Spain and Portugal. With Greek tourism also facing a fight for survival, we could see a price war between the eastern and western Med in 2012.”

Among long haul destinations, Post Office Travel Money expects Mexico – fifth placed in the barometer table at £44.03 (-3% year-on-year) – to continue its growth momentum. Low All Inclusive hotel prices, a strong pound to put more pesos in the pocket (+10.4% year-on-year) and a new Virgin Atlantic direct service to Cancun from June 2012 should help Mexico build on a 78% growth that made the peso the Post Office’s second fastest growing currency of 2011.

Similarly, Thailand – eighth in the barometer table at £46.15 – is expected to have a strong appeal after weathering Bangkok's autumn floods to put on 6% growth in Thai baht sales in 2011 and 35 per cent over five years. However, less than £5 separated Thailand from Vietnam (10th place, £50.71) and new non-stop flights from London to Hanoi and Ho Chi Minh City will help the country to compete with Thailand on price.

After putting on growth of 106 per cent in currency sales from August-November 2011, Vietnam is one of five countries tipped for the top in the Post Office's first list of emerging holiday destinations. It joins Argentina, whose currency, the peso, was fastest growing in the Post Office portfolio last year (+183% year-on-year). Daily direct flights to Buenos Aires and easy access to Uruguay and Chile are factors in its success. Qatar, Chile and Costa Rica complete the list of ‘new’ pretenders tipped to move into the mainstream.

Consumer research conducted for the Holiday Money Report revealed that while holidays are important, people will not take out loans to finance them, preferring to borrow from friends and family or delay payment by using a credit card.

Munro added: “The message that came out clearly from our holiday budgeting research was that 2012 will be all about affordability. Holidays may still be a priority but they are not a necessity and people will not knowingly get into debt to fund them.

“That means that holidaymakers will be looking very carefully at their own finances before committing to a holiday and eagle-eyed in searching out trips that represent genuine good value. The winning destinations will be those that offer good value not just for flights and accommodation, but for tourist staples like meals out and drinks.

“However, it will pay people to keep a watchful eye on exchange rate movements as well as considering easy ways to save money. By purchasing currency before leaving home, holidaymakers will avoid paying higher charges at airports and overseas at ATMs.”