© Reuters. FILE PHOTO: British Pound Sterling and U.S. Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

By Joice Alves

LONDON (Reuters) – Sterling edged lower on Tuesday after the Bank of England scrapped pandemic-era curbs on dividend payments by banks but warned some asset prices look stretched.

BoE Governor Andrew Bailey said its stress test showed the banking sector was well capitalised to cope with the fallout from COVID-19 on the economy. But the BoE also said in its Financial Stability Report (FSR) that some asset prices look stretched.

The bank added it is keeping a close eye on the housing market and how fast rising prices translate into household indebtedness.

“Sterling looks to have been pressured initially by broader risk related headwinds prior to reflecting on some of the negative references in the BoE FSR press conference,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

“Bailey has underlined heightened sensitivity to higher borrowing in weaker parts of the economy in addition to warning regarding potential threats to asset price valuations,” he added.

Sterling eased 0.2% to $1.3861 against the dollar by 0850 GMT, after jumping to a two-week high on Monday.

Versus the single currency, it was 0.1% lower at 85.49 pence.

Traders were also closely following plans to ease COVID-19 restrictions in England.

Sterling has been among the top performing G10 currencies this year following Britain’s quick vaccination rollout, which encouraged hopes for a quick economic recovery.

But investor confidence has been hit by a surge in COVID-19 Delta variant cases.

“Investors seems to be torn between optimism fuelled by the imminent lifting of all remaining corona restrictions in England and concerns about the spread of the Delta variant,” Commerzbank (DE:) wrote in a note to clients.

England will from July 19 lift the legal requirement to wear masks and for people to socially distance. The government said Britain’s vaccination drive has largely broken the link between infections and serious illness or death.

Some strategists expect cable to be driven by the dollar with U.S. inflation numbers due on Tuesday ahead of UK inflation data due on Wednesday.

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