Interest rates are heading lower, or so the markets believe. But before you rewrite your FX playbook, it’s worth asking: what does a rate cut really mean for your currency risk strategy?
After a historic tightening cycle, and following on from 2025, 2026 could be the year of further interest rate cuts – it’s anyone’s guess between the European Central Bank, the Fed and the Bank of England. Who will move first, and should you be worried?
For the FX markets, this matters. For your business, it matters even more.
So let’s break down what happens when central banks cut rates – and how to make sure your FX strategy doesn’t overreact to the noise.
Why Central Banks Cut Rates – and Why FX Markets Care
Central banks don’t cut rates just because they feel like it. They typically move in response to broader economic signals: slowing growth, rising unemployment, falling inflation, or an external shock (such as a trade collapse or a banking crisis).
Lower interest rates are meant to stimulate borrowing, investment, and consumption.
From an FX and interest rate perspective, rate cuts generally make a currency less attractive. Lower yields mean lower returns for investors, which can lead to capital outflows, which often push currencies lower.
But FX markets are forward-looking. Think of them as an information exchange of thousands, or even millions, of different views.
Traders (really, the market) often price in a rate cut long before it happens. That means by the time a cut is announced, much of the currency movement may already be done. In some cases, a rate cut can even trigger a rally if the market was expecting worse.
In other words: rate cuts matter, – but context matters more. A 25-basis-point cut by a dovish central bank may hit harder than a 50-basis-point cut that’s already been priced in. Timing, tone, and accompanying forecasts all affect how FX markets respond.
Understanding the Real Impact of FX and Interest Rates on Your Business
A shift in rates might sound technical, but it has very real implications for companies with currency exposure. Here’s what you might experience:
1. Currency Depreciation
If your base currency is expected to weaken because of a rate cut (e.g. GBP falling after a BoE cut), it could:
- Make imports more expensive
- Increase the local value of foreign currency payables
- Improve your competitive pricing abroad (if you export)
Whether that’s good or bad depends on how your business earns, spends, and prices in foreign currencies. For example, an exporter earning in USD but reporting in GBP might benefit, while an importer purchasing in EUR could see margins squeezed quickly.
2. Changing Hedging Costs
Forward points (the interest rate differential between two currencies) are directly influenced by rate moves. A rate cut can:
- Reduce the cost of hedging specific pairs
- Increase the forward premium or discount
- Change the economics of rolling hedges over time
That’s why understanding FX and interest rates together is essential, a cheaper hedge might not be better if your exposure profile shifts.
But the implications extend beyond cost.
Hedging decisions often tie into budgeting, board-level reporting, and investor confidence. Misreading how interest rates alter hedging mechanics could create downstream confusion in your wider financial planning (uncertainty in markets and business is not good).
3. Market Volatility
Even a well-signalled cut can still spark short-term volatility, particularly if central bankers’ commentary surprises markets. For businesses that regularly transact across currencies, these swings can affect cash flow timing, pricing, and margins.
Rate announcements are also emotional events in markets. The tone of a press conference, a throwaway comment, or an unexpected data revision can all move markets just as much as the headline number.
That’s not to say you should panic. But you should prepare.
What a Rate Cut Doesn’t Mean (But Many Think It Does)
Let’s clear up a few common misconceptions we hear:
“I should stop hedging – the currency will be weaker”
Not necessarily. A weaker currency can hurt your purchasing power, especially if you’re importing or paying overseas suppliers. The question is whether the market has already priced in the move, and whether a hedge helps protect your margin.
“The central bank will manage it – I don’t need a plan”
Rate cuts are a reaction, not a solution. FX markets still move on geopolitics, supply chain disruptions, and investor sentiment. A rate cut might calm some pressures, but it doesn’t remove risk.
“We’ll wait and see – it’s just temporary”
Delaying a decision is still a decision. If your currency moves 4% in a week, you don’t necessarily get that margin back. Smart FX strategy is proactive, not reactive.
The most dangerous FX assumptions often stem from overconfidence. Assuming a rate move will go your way – or that it won’t affect you – is a shortcut to increased exposure. It pays to test your thinking regularly and adjust your hedging stance accordingly.
What BLK.FX Clients Are Doing Right Now
We work with businesses across sectors, from e-commerce and manufacturing to professional services and real estate. As central banks prepare to cut, here’s what we’re helping clients do:
1. Map Exposure Across Timeframes
We review when and where currency exposure occurs – monthly payrolls in USD, quarterly EUR revenue, one-off invoices in ZAR – to understand what’s really at stake.
We often find businesses underestimate their exposure windows or over-focus on one dominant currency. By taking a timeline-driven view, we help uncover blind spots and rebalance strategies to reflect actual risk.
2. Model Rate Cut Scenarios
We stress-test plans:
“What if GBP falls 3%?”
“What if EURUSD spikes for a week then rebounds?”
This gives clients clarity, not guesswork.
Scenario planning isn’t about predicting; it’s about asking better questions.
When you know how your business behaves under different FX conditions, you can take pre-emptive action rather than constantly firefighting.
3. Adjust Hedge Ratios Thoughtfully
A rate cut may warrant reducing or extending hedge cover – but not abandoning it. We advise based on your objectives, risk appetite, and forecast visibility.
Some clients choose to lock in a greater portion of their exposure to create stability in uncertain periods. Others take a more dynamic approach, using options or layered hedging to adapt to evolving conditions.
4. Build Flexibility Into Execution
We help clients avoid locking into poor pricing or rigid hedges. Blended approaches, using spot, forwards, and layered hedging, can provide agility as rates shift.
Our role is to provide not just tools, but decision-making frameworks that empower clients to respond strategically, not emotionally.
It’s Not About the Cut – It’s About the Context
At BLK.FX, we don’t chase headlines. We decode them.
When interest rates change, they don’t do so in a vacuum. They move because of deeper market forces, and those forces affect currencies in unpredictable ways. Your job isn’t to predict the next rate move. It’s about building a strategy that works across multiple scenarios.
FX and interest rates are linked but they don’t move in lockstep. That’s why our clients work with us to develop strategic frameworks that hold up when the market does the opposite of what’s expected.
Staying ahead in FX is not about having the perfect forecast. It’s about having the confidence that your strategy can flex and hold up even when the unexpected happens.
Final Thoughts: Clarity > Certainty
You can’t control what central banks do, but you can control how you respond. A rate cut might shift the FX landscape, but it doesn’t rewrite the fundamentals of good currency risk management:
- Know your exposure
- Plan across multiple timelines
- Use tools with purpose
- Don’t outsource strategy to sentiment
BLK.FX helps clients build strategies that are durable, not reactive. We translate market shifts into actionable insights, tailored to your specific exposure.
We don’t do “wait and see.” We help you plan and act.
Talk to BLK.FX
Wondering how rate changes could impact your currency position?
👉 Book a 30-minute strategy call with our team to:
- Stress test your current approach
- Get clear on your exposure map
- Understand how rate shifts affect your hedging decisions
Clarity in a shifting market – that’s what BLK.FX delivers.
