LONDON: Sterling was little changed on Thursday after an early dip, with traders pausing after days of heavy selling that has put the currency on track for its biggest weekly fall in over two months.
Figures this week showed Britain's housing market may be cooling, prompting some of the more aggressive bets on the timing of the first Bank of England rate hike to be scaled back.
That helped pull the pound back from a recent 5-1/2 year peak against the dollar and an 18-month high against the euro.
It has also contributed to a narrowing of the yield premium paid by British government bonds over German Bunds to its lowest in three weeks.
The selling in sterling continued early on Thursday but traders' appetite to push it lower quickly evaporated.
Barring a continued recovery through to the end of the week, the pound is still on course to post its biggest weekly fall against the dollar and euro since mid-March.
"We had reached a sweet spot in terms of UK macroeconomic data and sentiment," said Neil Jones, head of hedge fund FX sales at Mizuho in London.
"But the market is still fundamentally and structurally long (of pounds), so I think this weakness is only temporary."
Sterling fell as low as $1.6691 early on Thursday, but recovered to $1.672 in late trade, little changed on the day. On Wednesday, the pound fell 0.6 percent, its biggest one-day fall against the dollar in almost four months.
The pound eased slightly versus the euro, which was up 0.1 percent at 81.44 pence per euro.
"We have stalled to some extent on sterling this week, but I still think there is the potential for further moves, particularly against the euro, especially if we get aggressive action from the ECB next week," said James Knightley, senior economist at ING.
The European Central Bank is widely expected to ease monetary policy when it meets next week, after its president Mario Draghi suggested as much this month.
Financial markets still widely expect the BoE to be the first major central bank to raise interest rates following emergency post-crisis rate cuts to virtually zero.
But the latest housing data dampened some trader expectations that this could happen as soon as this year, earlier than the second quarter of 2015 as flagged by the BoE.
Partly reflecting this, the premium 10-year British bonds offer over Germany's was at its lowest in three weeks at 118 basis points, 3 bps down from Wednesday and 8 bps off this week's highs.
"There has been some evidence that the housing market is cooling, that has taken some pressure off the Bank of England to take immediate action," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
The BoE has said it will tighten mortgage rules before raising interest rates to deal with the housing market. Analysts say such restrictions could affect the timing of a rate hike.
Government data on Thursday showed the Help to Buy mortgage guarantee programme had only had a limited impact on lending in the first six months of its existence.
Investors will look for fresh evidence on the state of the housing market, when the Bank of England releases its mortgage lending data for April on Monday.
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