LONDON May 27 (Reuters) - Sterling weakened against the dollar on Tuesday after a fall in British mortgage lending gave investors an excuse to cash in on the pound's recent gains a day after U.S. drug company Pfizer abandoned its attempt to buy Britain's AstraZeneca.
Data from the British Bankers' Association painted a mixed picture of the housing market but showed Britain's banks last month approved the lowest number of mortgages since August.
One week before the Bank of England releases its own mortgage data for April, the figures cooled some of the fervour surrounding the housing market and tempered some of the more bullish expectations that the BoE could start raising interest rates later this year.
The mortgage approvals numbers "have just underlined the fact that perhaps the housing market might be undergoing (some) deceleration," Jeremy Stretch, head of currency strategy at CIBC World Markets.
"Also from the equity side, you have that M&A fizz which had been potentially supporting sterling...that has been taken off the agenda at least for the short-term as well. Those two factors together were seen as disappointing somewhat," he said, referring to the Pfizer-Astrazenaca saga.
Pfizer on Monday walked away from its attempt to buy AstraZeneca for nearly 70 billion pounds but markets were closed that day for holidays in Britain and the United States.
Sterling fell to its lowest in more than a week against the dollar to $1.6790, down around a quarter of one percent on the day, while it was off around 0.1 percent against the euro at 81.10 pence per euro.
Sterling has been rising steadily since last year, underpinned by expectations that a rapid economic recovery will see the BoE be the first major central bank to raise interest rates, most likely early in 2015 but maybe even sooner.
BoE deputy governor Charlie Bean's comments on Sunday that the bank's plan to raise rates gradually means the first hike could come earlier than may otherwise have been the case had underpinned the currency in early trade before the mortgage data.
British yields were little changed on the day, with the 10-year yield broadly steady at 2.64 percent and the Gilt future settling 3 ticks lower at 110.87.
The yield premium gilts offers over equivalent German Bunds, however, was 3 basis points higher at 125 bps as recent European Central Bank commentary reinforced the view that the euro zone and UK central banks are on a diverging monetary policy path.
ECB President Mario Draghi said on Sunday "more pre-emptive action may be warranted to ward off deflation".
The pound may still be poised to launch another test of $1.70 against the greenback. The pound traded as high as $1.6996 earlier this month, a level not seen since August 2009.
It may be a slow grind higher though, if market positioning is any guide. The latest data from the Commodity Futures Trading Commission released on Friday show speculators were net long of sterling to the tune of $3.48 billion.
That is the heaviest net long position held by short-term FX trading accounts among major currencies, a reflection that their most bullish bets are for the pound to appreciate. Essentially, the market is already heavily betting this way and there may not be much more upside potential from here on.
"Sterling positioning remains the longest of any of the currencies covered here. However, positioning is no longer increasing, which may constitute a significant headwind for the pound," JP Morgan strategists wrote in a note on Tuesday. (Editing by Hugh Lawson and Angus MacSwan)