It’s very difficult to know quite what pre-Christian Angles, Saxons, and Jutes believed because, apart from a few very brief runic inscriptions, nothing that they wrote down has survived. There can be a tendency to romanticise later English folklore as having roots in paganism, but it is most likely many traditions developed after the Angles and Saxons became Christian. Nevertheless, creatures such as elves and dragons in English folklore are generally agreed to have their origins in the pre-Christian Germanic world.

It is true that early English poetic sources indicate superstitions about hills, but they also, for instance, indicate superstitions about fens (marshes). You can find this in both robustly Christian works such as the Vita Sancti Guthlaci and more pagan-influenced, secular works such as Beowulf. And yet some of the first areas in Britain to be thoroughly Germanicised were Norfolk and Lincolnshire, which in those days were covered with fenland. Of course, the Angles didn’t live in the actual fens themselves, but on the dry land that surrounded the fens. Hills are rather more stable underfoot than fens, but they’re not particularly good places to live either, being cold, windy, and difficult to farm effectively. Apart from hill-forts reoccupied by the social elite, people in western Britain in the fifth and sixth centuries didn’t often live on hills either; they lived in the valleys between the hills. As you yourself say, you can make the argument that practical considerations that precluded living on hills may have been the reason that people came to see them as desolate and haunted.

Your question, however, concerns why the Angles, Saxons, and Jutes did not settle in hilly regions. Possibly the first point to make is that, in fact, they did. The North York Moors, the Chilterns, the South Downs, the Cotswolds: all seem to have been Germanicised by the end of the sixth century. Thankfully, we do essentially know why this is. First, the hillier parts of Britain are mostly in the west, away from the North Sea by which Germanic culture spread to Britain from regions which are now part of the Netherlands, Germany, and Denmark. Fifth-century Germanic material mostly comes from areas along the east and south coasts, apart from further-inland material along major rivers. As you know though, Germanic culture and the emerging English language did not stay restricted to these areas, but came to dominate most of lowland Britain. At this point I would recommend looking at some sort of map of Roman Britain: of settlements, of roads, of coins or other small finds. You will notice that the distribution is remarkably similar to maps of sixth-century Germanic material. To some extent, poor hilly regions will always have less money, and thus fewer towns, and thus fewer roads, but that is, in fact, exactly the point. In a pre-industrial farming society, most of the wealth is in the form of land that can be used for growing crops. If you look at a map of farming in Britain today, you’ll essentially see a crop-producing stripe in the east, a dairy producing stripe down the middle, and a beef and lamb producing stripe in the west. Fifty years ago, things used to be a lot more mixed, and they were far more mixed in the sixth century. However, the same climatic and geological factors were at play. You can, quite simply, produce a lot more calories in Norfolk than you can in Powys. Like Romanisation, Germanicisation took place in the wealthier and more agriculturally productive parts of Britain. Envisioning quite how this happened may depend on how you envision the Germanicisation of Britain more generally. If you imagine it in terms of great folk migrations, then it might involve a tribe of Germanic settlers finding, and seizing, the best land. If you think of it as a takeover by a warrior elite, then that warrior elite might only really be interested in taking over the territories which would bring them great wealth. If you view it as a largely peaceful process of cultural exchange, then you might imagine Germanic culture spreading quickly through a well-populated lowland east while struggling to make inroads in the remote, sparsely populated hills of the west. However you imagine it, it is less likely that patterns of Germanicisation were driven by a particular cultural superstition, and more likely that they were driven by the same geographic factors which saw similar patterns followed by the Romans, the Danes, and the Normans. Indeed, in terms of population distribution, this pattern broadly existed well into pre-history, and would not come to an end until industrialisation.

As I can’t read Old English, I’m afraid I can’t really answer your query about the Pecsaetan, but I would say that the ‘peak-dwellers’ meaning fits in better with other names for Anglian ‘tribes’ than ‘puck-dwellers’.

Bibliography

Ken Dark and Petra Dark, The Landscape of Roman Britain

Sue Harrington and Martin Welch, The Early Anglo-Saxon Kingdoms of Southern Britain AD 450-650: Beneath the Tribal Hidage

Michael E. Jones, The End of Roman Britain

Martin Millet, The Romanisation of Britain

Susan Oosthuizen, ‘The Anglo-Saxon kingdom of Mercia and the origins and distribution of common fields’

Martin Welch, ‘Rural settlement patterns in the Early and Middle Anglo-Saxon periods’