By Ritvik Carvalho

LONDON (Reuters) – Sterling steadied against the dollar and euro on Thursday after two consecutive days of losses prompted by fears that the European Union might ban vaccine exports to Britain, which relies on them for its inoculation campaign.

The European Commission, which oversees trade policy for the 27 EU member states, set out a proposal to ensure planned exports by drugmakers do not threaten already reduced EU supply.

The pound has lost over 1% against the dollar this week, as the EU, which has lagged Britain and the United States in rolling out vaccines, considers the measure. A rise in bond yields as well as some risk aversion in markets have also broadly benefited the dollar in recent weeks.

By 0900 GMT on Thursday, sterling traded flat against the dollar at $1.3684, and flat against the euro at 86.25 pence.

Bets that Britain’s rapid pace of vaccinations would lead to a faster economic rebound made sterling the best performing G10 currency against the dollar as recently as February, but it has since lost that perch. The pound climbed as high as $1.42 in February, and has lost 4% since.

“While sterling has struggled lately, we note that its short-term financial fair value has improved vs the euro over the past two weeks, by more than 1%,” said Petr Krpata, chief EMEA and IR strategist at ING.

“With euro-sterling no longer being meaningfully undervalued (in fact now close to its fair value of 86.40 pence), this opens the door for further eventual declines in the cross towards our target of 85 pence. Short-term valuation is no longer a sterling headwind,” he said.

Flash purchasing managers indexes for Britain came in better than expected on Wednesday, brightening the outlook for an economy that last year suffered its worst annual contraction in 300 years.

(Reporting by Ritvik Carvalho; Editing by Gareth Jones)