© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

By Joice Alves

LONDON (Reuters) – Sterling fell on Thursday after Bank of England Governor Andrew Bailey warned against over-reaction to rising inflation in Britain.

The pound edged 0.2% lower to $1.3796 versus the dollar at 0835 GMT. It slipped 0.1% against the euro to 85.85 pence, after gaining almost 5% versus the euro in the first half of the year.

Bailey said on Thursday in his annual Mansion House speech that it was important to ensure that the recovery was not undermined by a premature tightening in monetary conditions, as a rise in inflation was likely to be temporary.

Sterling was one of the worst-performing G-10 currencies last week after the BoE kept the size of its stimulus programme unchanged and said inflation would surpass 3%, but that the climb further above its 2% target would be only temporary.

But analysts said cable was faring relatively well versus a strengthening dollar, after the U.S. Federal Reserve signalled it would raise interest rates and end emergency bond-buying sooner than expected.

“Sterling continues to show good resilience to the dollar’s appreciating pressure compared to other G10 peers, with markets still reluctant to price in a risk premium related to the fast spreading of the Covid-19 Delta variant in the UK,” analysts at ING said in a note to clients.

Daily confirmed cases have been rising for weeks in Britain but a rapid vaccination programme appears to have weakened the link between infections and deaths.

This week, the European Union agreed to extend an exemption on customs checks on chilled meat shipments to Northern Ireland.

In a move designed to ease post-Brexit tensions over the issue dubbed the “sausage row”, the EU agreed to extend the grace period which was otherwise due to end on July 1 by three months.

Currency analysts said that the post-Brexit dispute has had little impact on the pound so far, but that might change.

“With political divergences still quite evident, the risk of a re-escalation of trade tensions between the EU and UK appears all but likely, and sterling might then get caught in the cross-fire more than it did this time,” ING said.

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