Why stable interest rates + reduced QT might reduce FX volatility (or not)

Navigating foreign exchange markets has become increasingly complex for businesses operating globally. Recent market events have shown just how quickly currency volatility can impact bottom lines. Since March 2025, significant volatility has rattled markets, resulting in drastic swings within just a week, largely driven by policy announcements related to tariffs ¹. With central banks adjusting their monetary policies and quantitative tightening programs evolving, understanding the relationship between interest rates, QT, and FX volatility has never been more critical for businesses managing international operations.

Understanding the current monetary policy landscape

The global monetary policy environment has undergone dramatic shifts recently. The Federal Reserve reduced the federal funds target rate range by 50 basis points during its September 2024 meeting after two and a half years of aggressive monetary policy tightening measures ². This marked a significant turning point in monetary policy direction.

Meanwhile, the European Central Bank faces its own challenges. ECB policymaker Olli Rehn stated that inflation appears to be stabilizing at target while the growth outlook has further weakened as a result of trade tensions ³. The ECB's primary mandate remains maintaining price stability, which means keeping inflation at around 2% ³.

These diverging monetary policies create unique challenges for businesses. When central banks move in different directions, currency pairs can experience heightened volatility. The complexity increases when you consider that 195 countries all have their own payments systems, regulations, and levels of technological maturity ⁴.

The mechanics of quantitative tightening and its FX impact

Quantitative tightening represents the reverse of quantitative easing. During QT, central banks stop buying more bonds and stop reinvesting the principal maturing on the bonds they already hold ³. This process typically strengthens the currency as it reduces the money supply in circulation.

The impact on foreign exchange markets can be substantial. When major central banks reduce their QT programs, it signals a shift in monetary stance that currency traders closely monitor. For businesses, this translates into potential changes in hedging costs and cross-border payment expenses.

Consider the real-world impact: banks can charge up to 4% on international transfers ⁵. When FX volatility increases, these costs can spike even higher. Stockford Limited, a holding company with businesses worldwide, saved USD six figures over a six-month period by optimizing their approach to international transfers during volatile periods ⁵.

How stable interest rates theoretically reduce volatility

Stable interest rates create predictability in currency markets. When businesses know that rates will remain steady, they can plan their international operations with greater confidence. The theory suggests that stable rates reduce speculative trading and create more orderly markets.

Historical data provides some support for this theory. On average, returns for large caps, mid caps, and small caps are positive in the 6-month, 12-month, and 24-month periods after the first rate cut in a rate cut cycle ². This stability in equity markets often correlates with reduced FX volatility.

However, the relationship isn't always straightforward. At the latest FOMC meeting in March, it was noted that the uncertainty of the impact of government policies on the economic outlook will warrant a careful approach to monetary policy ¹. This uncertainty can create volatility even when rates remain stable.

For businesses managing multi-currency operations, understanding these dynamics is crucial. Multi-currency accounts allow you to receive, hold, and send funds in different currencies, helping you navigate volatility more effectively ⁶.

The counterargument: Why volatility might persist

Despite stable interest rates and reduced QT, several factors could maintain or even increase FX volatility. Trade policy uncertainty represents a major wildcard. On April 2nd, the current administration announced sweeping tariffs that were more aggressive than markets had anticipated, leading to the S&P 500 Index dropping over 10.5% in the two trading days following the announcement ¹.

Geopolitical tensions add another layer of complexity. The Russia-Ukraine conflict led to a slowdown in fintech investments due to economic sanctions and geopolitical instability ⁷. These events can trigger sudden currency movements regardless of interest rate stability.

Technological disruption also plays a role. The global fintech market is projected to reach USD 412.65 billion in 2032, growing at a CAGR of 15.1% between 2025 and 2032 ⁷. As new payment technologies emerge, they can disrupt traditional currency flows and create unexpected volatility.

Businesses need robust strategies to manage these uncertainties. Common business bank charges in Canada include monthly maintenance fees, transaction fees, and foreign exchange markups ⁸. During volatile periods, these costs can significantly impact profitability.

Real-world implications for businesses

The practical impact of FX volatility on businesses cannot be overstated. For businesses, the prospect of higher input costs or disrupted supply chains can lead to a slowdown in capital expenditures, reduced investment and a more cautious hiring approach ¹. On the consumer side, the anticipation of rising prices can erode confidence, prompting households to pull back on discretionary spending ¹.

Consider the experience of Two More Glasses, a Hong Kong-headquartered fine wine and spirits e-retailer. After partnering with Airwallex, they saved over C$40,000 annually on FX and transfer fees ⁹. They also saw a 30% increase in global business and saved 50% time on payment management ⁹.

The efficiency of payment systems matters enormously during volatile periods. According to Swift's Chief Strategy Officer Thierry Chilosi, 84 percent of global payments are now either direct payments or they have one intermediary ⁴. Furthermore, 89 percent of payments that flow through the Swift network arrive at the destination bank within an hour ⁴.

Strategic approaches to managing FX risk

Successful FX risk management requires a multi-faceted approach. First, businesses need to understand their exposure. International transfers are expected to increase five percent per year until 2027 ⁴, making effective risk management increasingly important.

Diversification remains a key strategy. By maintaining operations and accounts in multiple currencies, businesses can naturally hedge some of their exposure. Global accounts provide access to local account details around the world, enabling quick money transfers ⁶.

Technology plays an increasingly important role in risk management. Real-time payments systems are expected to generate $173 billion in additional economic output by 2026, according to the Center for Economic and Business Research ⁴. These systems enable businesses to respond quickly to market changes.

Automation can also reduce operational risk. According to data analytics company LexisNexis, up to 50 percent of payments that don't complete or are delayed are due to simple data entry problems ⁴. Automated systems help eliminate these errors while providing better visibility into FX exposure.

The role of technology in reducing volatility impact

Modern financial technology offers powerful tools for managing FX volatility. The global digital payment market is expected to grow at a CAGR of 15.62% during 2024-2032 ¹⁰. This growth brings innovation that helps businesses better manage currency risk.

Central Bank Digital Currencies represent a potential game-changer. Currently, 90 percent of central banks globally are working on developing a CBDC, according to Jason Clinton at J.P. Morgan ⁴. These digital currencies could reduce settlement risk and improve payment efficiency.

Blockchain technology shows particular promise. J.P. Morgan's blockchain division has conducted successful simulations testing cross-border transactions in Singapore dollar and euro CBDCs ⁴. These innovations could fundamentally change how businesses manage FX risk.

For businesses today, leveraging available technology is crucial. Interchange fees, which are transaction fees that merchants are charged when accepting card payments, can be optimized through smart payment routing ¹¹. This becomes especially important during volatile periods when every basis point matters.

Looking ahead: Preparing for multiple scenarios

The future of FX volatility remains uncertain, requiring businesses to prepare for multiple scenarios. The Federal Reserve will likely maintain a more patient approach with their monetary policy actions ¹. However, external shocks could quickly change this trajectory.

European policy adds another variable. ECB's Rehn noted that large tariff increases will boost inflation in the United States, but in the Eurozone the effects on inflation can be two-way ³. This complexity makes prediction challenging.

Businesses should focus on building resilience rather than trying to predict specific outcomes. This means maintaining flexible payment infrastructure, diversifying currency exposure, and investing in technology that provides real-time visibility and control.

The embedded finance revolution offers new opportunities. Global Embedded Finance Service Companies Size was estimated at USD 3148.69 million in 2023 and is projected to reach USD 4416.15 million by 2029 ¹². These solutions can help businesses integrate FX management directly into their operations.

Practical steps for businesses

Taking action to manage FX volatility doesn't require complex derivatives or expensive hedging programs. Start by understanding your current costs. Different banks in Canada have their own fee structure and types of business bank accounts ⁸. Comparing these costs can reveal significant savings opportunities.

Implement systematic approaches to international payments. Automated accounts payable management can reduce errors and improve efficiency ¹³. This becomes particularly valuable when managing payments across multiple currencies.

Consider your payment acceptance strategy. Multi-currency payment acceptance allows businesses to offer local payment methods to international customers ¹¹. This can reduce conversion costs and improve customer experience.

Build relationships with partners who understand global markets. McLaren Racing modernized their cross-border payments with strategic partnerships ⁸. Similarly, RYSE transformed complex cross-border finances into streamlined, cost-saving operations ⁶.

Conclusion: Navigating uncertainty with the right tools

While stable interest rates and reduced QT may theoretically reduce FX volatility, the reality is far more complex. Trade tensions, geopolitical risks, and technological disruption ensure that currency markets will remain challenging to navigate. The key for businesses isn't to predict the future perfectly but to build robust systems that can handle multiple scenarios.

Success in this environment requires combining strategic thinking with practical tools. Understanding the relationship between monetary policy and FX markets provides the foundation. Building on this with modern payment infrastructure, automated systems, and multi-currency capabilities creates operational resilience.

For businesses looking to optimize their approach to FX management, Airwallex offers comprehensive solutions designed for the modern global economy. With multi-currency accounts, automated payment systems, and competitive FX rates, Airwallex helps businesses navigate volatility while focusing on growth. The platform's integrated approach to global financial operations has helped companies like Two More Glasses achieve significant cost savings while expanding internationally.

Whether interest rates remain stable or volatility persists, having the right financial infrastructure makes all the difference. By combining strategic planning with modern financial technology, businesses can turn FX management from a source of risk into a competitive advantage.

FAQ

How do stable interest rates affect foreign exchange volatility?

Stable interest rates typically reduce FX volatility by providing predictable monetary policy signals to markets. When central banks maintain consistent rates, it eliminates uncertainty about future policy direction, reducing speculative trading and currency swings. However, other factors like geopolitical events, trade policies, and economic data can still drive volatility even with stable rates.

What is quantitative tightening and how does reducing it impact currency markets?

Quantitative tightening (QT) is when central banks reduce their balance sheets by selling securities or letting them mature without replacement. Reducing QT typically increases liquidity in financial markets, which can lead to more stable currency conditions. This increased liquidity often reduces the dramatic price swings that occur when markets are starved of capital.

Why did FX markets experience significant volatility in March 2025?

According to market reports, significant volatility rattled markets since March 2025, with drastic swings occurring within just a week. These fluctuations were largely driven by policy announcements related to tariffs, with the administration announcing sweeping tariffs on April 2nd that were more aggressive than markets had anticipated.

How can businesses protect themselves from currency volatility?

Businesses can implement several strategies including using treasury management software to monitor FX exposure, establishing hedging policies with forward contracts or options, and diversifying currency exposure across multiple markets. Companies like Airwallex provide comprehensive FX solutions that help businesses manage international payments and reduce the impact of currency fluctuations on their operations.

What role do corporate business cards play in managing FX costs?

Corporate business cards with multi-currency capabilities can significantly reduce FX costs by offering competitive exchange rates and lower fees compared to traditional banking solutions. These cards eliminate the need for multiple currency conversions and provide real-time visibility into spending across different markets, helping businesses better manage their international expenses.

How did the Federal Reserve's rate cuts in 2024 impact market performance?

The Federal Reserve reduced the federal funds target rate by 50 basis points in September 2024 after two and a half years of aggressive tightening. Historical data from 1983 onwards shows that U.S. equity markets typically respond positively to the first rate cut in an easing cycle, with performance varying across large-cap, mid-cap, and small-cap segments over 6-month, 12-month, and 24-month periods.

Citations

1. https://www.usicg.com/publications/market-volatility-update-april-2025/

2. https://sterlingcapital.com/insights/u-s-equity-market-performance-following-the-first-fed-funds-rate-cut/

3. https://www.fxstreet.com/news/ecbs-rehn-downside-risks-have-materialised-since-march-rate-meeting-202504090920

4. https://www.jpmorgan.com/payments/payments-unbound/volume-3/cross-border-payment-modernization

5. https://www.moneymover.com/customer-stories/stockford-limited/

6. https://www.airwallex.com/ca/blog/what-is-a-multi-currency-account

7. https://www.marketsandata.com/industry-reports/fintech-market

8. https://www.airwallex.com/ca/blog/bank-charges-canada

9. https://www.airwallex.com/ca/case-studies/two-more-glasses

10. https://www.imarcgroup.com/top-digital-payment-companies

11. https://www.airwallex.com/ca/blog/interchange-fees-explained

12. https://www.globalgrowthinsights.com/blog/embedded-finance-service-companies-250

13. https://www.airwallex.com/ca/blog/accounts-payable-automation