May 30, 2014 / 12:41 PM / 3 years ago

Sterling recovers foothold after M&A, housing blows

LONDON, May 30 (Reuters) - Sterling recovered some ground on Friday after a week of heavy selling that has cast doubt on the UK currency's run to 5-1/2 year highs.

The pound has risen more than 10 percent against a basket of currencies in the past 12 months on the back of expectations that an improving economy would force the Bank of England to raise interest rates faster than its euro zone and U.S. peers.

Figures this week, however, showed Britain's housing market may be cooling, prompting some aggressive bets on the timing of the first rate hike to be scaled back and putting the currency on track for its biggest weekly fall in more than two months.

Dealers say sales of the pound have also been driven by the collapse, at least for the moment, of Pfizer's attempt to buy AstraZeneca for nearly 70 billion pounds ($118 billion).

"One thing that seems fairly clear is that any of that M&A-related flow against the pound has cooled off today," said a dealer with one London bank.

"Where we go from here will depend a lot on next week's action at the ECB and then non-farm payrolls in the U.S."

The pound rose just over 0.1 percent to $1.6740 and by slightly less against the euro to 81.31 pence.

Gilt markets have also been showing signs of doubt over the broad-based nature of Britain's economic recovery, still producing little of the broader-based price pressures which would raise inflation and force the BoE to act.

The yield premium paid by British government bonds over German Bunds hit its lowest in three weeks on Thursday in response.

Yields rose in tandem with Bunds and U.S. Treasuries on Friday, after Federal Reserve policymaker Esther George said the Fed's eventual rate rises should be steeper than many in the market expected.

The 10-year yield was last up 1.8 basis points at 2.566 percent. (Reporting by Patrick Graham and Andy Bruce; Editing by Louise Ireland)

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