The UK housing market is heating fast in a trend that should ultimately support the pound sterling over coming months.
The surge confirms the UK housing market is rude health and is now in danger of overheating.
This is positive for the pound exchange rate complex (GBP) as there is an underlying expectation amongst currency trafers that interest rates must ultimately rise to ensure the risks posed by rapid house price rises must be avoided.
By raising interest rates the Bank of England would slow lending and house price growth as borrowing becomes more expensive.
The off-shoot of higher interest rates is a higher exchange rate as foreign capital flows into the UK to take advantage of higher interest rate yields.
“This is good news - the pound has been under pressure against both the dollar and the euro over the past few weeks as market expectations for UK rate hikes have been pushed further into 2016; despite Governor Carney’s suggestion of the first hike being around the turn of the year," notes Andy Scott, economist at forex providers HiFX.
It is noted that the GBP/EUR recovered from 1.3450 to 1.3540 following the data, "but we expect the euro to strengthen further in the months ahead, driving GBP/EUR closer towards 1.30," warns Scott.
GBP/USD rose from 1.5150 to 1.52, and HiFX expect to see the dollar weaken as the Federal Reserve maintain a very cautious approach to tightening monetary policy, and for the pair to head towards 1.60.
However there are risks to HiFX's negative view on sterling as the strengthening housing market and anticipated pickup in prices should keep economic sentiment positive and therefore support a sustained recovery in the British pound.
It is noted that there remains a fairly strong correlation between consumer confidence which is a key pillar of domestic demand and currently sits at a 15-year high, and house price growth over the years.
"With the global economy showing signs of weakening, especially in emerging economies and those that rely heavily on commodities, the strength of consumer spending in the UK will be vital to shoring up GDP growth in the coming quarters,” note HiFX.