This paper presents a digital image watermarking scheme in the frequency domain for colour images. The algorithm was developed using the digital wavelet transform together with fractal encryption. A host image was first transformed into a frequency domain using the discrete wavelet transform after which a binary watermark was permuted and encrypted with a fractal generated from the watermark and a random key. The encrypted watermark is then embedded into the host image in the frequency domain to form a watermarked image. The algorithm’s performance was examined based on the image quality of the watermarked image using peak signal to noise ratio. A perceptual metrics called the structural similarity index metric was further used to examine the structural similarity of the watermarked image and the extracted watermark. Again, the normalised cross-correlation was introduced to further assess the robustness of the algorithm. Our algorithm produced a peak signal to noise ratio of 51.1382dB and a structural similarity index of 0.9999 when tested on colour images of Lena, baboon and pepper indicating the quality of the watermarked images produced and hence indicates a higher imperceptibility of the proposed algorithm. The extracted watermark also had a structural similarity of 1 and a normalised cross correlation of 1 indicating a perfect similarity between the original watermark and the extracted watermark hence shows a higher performance of the proposed algorithm. The algorithm also showed a very good level of robustness when various attacks such as Gaussian noise, Poisson noise, salt and pepper noise, speckle noise and filtering were applied.