The sensitivity to steel is greeeatly reduced because steel is alloyed. So they can use magically enhanced bronze as an option! And most use steel just fine.
And Serenians only have a very small bit of fae in them in the first place; they are not true fae, but are rather the result of human ancestors who interbred with fae, and that has been diluted over generations. So basically it varies from person to person depending on their bloodlines and amount of magic they have. People with more magic have greater sensitivities, and people with stronger fae bloodlines are also more sensitive. (And usually have more magic.)
Steel, in general, poses no threat to Serenians.
Also, their blood is red.
Basically, there are two explanations:
1.) an element is not a compound. You can consume table salt, but you can't touch chlorine with your bare hands. The raw element is toxic to them, but it is still part of their chemistry in other forms that does not harm them.
2.) It's not an actual allergy. The way iron aversion works in some folklore is that it's more about the belief that iron is harmful (plus something something iron is a real element, fae are incorporeal and not quite of this world and follow fae laws and iron is a harsh reminder of the real world and forces them to obey regular laws, etc.). So like if you show your blood to a fae and try to say it's iron, it's not really gonna do anything because you don't really think of it as iron, but as blood. That plus point #1.
So basically take your pick!
Plus, fantasy setting with Rule of Cool, etc.