AUD/USD renews eight-month high near 0.6840 as market considers dovish Fed policy

• AUD/USD rose to near 0.6840 following Fed policy announcement.
• The Fed cut its key lending rates by 50bps to 4.75-5.00%.
• Australian employment data for August came in better than expected.

AUD/USD is hitting a fresh eight-month high near 0.6840 in Thursday’s European session. The Australian asset strengthens as the US dollar (USD) retreats following the Federal Reserve’s (Fed) monetary policy announcement.

The Fed made its first interest rate cut in more than four years, cutting interest rates by 50 basis points (bps) to 4.75%-5.00%. Market participants were confident the Fed would pivot toward policy normalization, but were divided on the likely size of the interest rate cut.

From a historical point of view. Favorable Fed interest rate decisions result in a sharp increase in outward flows to emerging markets and risk-perceived currencies. Market sentiment is upbeat due to the Fed’s top rate cut. S&P 500 futures posted significant gains in the European session. The US Dollar Index (DXY), which tracks the greenback against its major peers, is down from a weekly high of 101.50 to near 100.60.

Meanwhile, policymakers see the federal funds rate heading to 4.4% by the end of the year, suggesting there will be another 50bp drop in key lending rates. On the contrary, the CME FedWatch tool shows that the central bank will reduce the rest of monetary policies by 75 bps this year.

On the Aussie front, upbeat Australian employment data for August strengthened the Australian dollar (AUD). The report showed Australian employers hired 47.5 thousand fresh workers, more than estimates of 25 thousand, but about the same as the previous release of 48.9 thousand, revised down from 58.2 thousand. The unemployment rate remains steady at 4.2%, as expected.