Sterling weakens after polls show Conservative lead is narrowing

Sterling fell on Tuesday after a second poll showed the Conservative Party's lead is narrowing before the British election next month. Prime Minister Boris Johnson's Conservatives have led the opposition Labour Party and hope that a Johnson victory would end more than three years of uncertainty over Brexit have lifted the pound, despite concern about a no-deal exit from the European Union.

But according to a survey by Kantar published on Tuesday, Labour has squeezed the Conservatives lead to 11 points from 18 over the past week. The poll is the second in two days to show a narrowing of the ruling party's lead. On Monday, an ICM poll for Reuters gave the Conservatives a seven-point lead, down from 10 points a week earlier.

Sterling slipped 0.2 percent to $1.2876 in early European trading on Tuesday, after rising as high as $1.2913 on Monday. Against the euro, the pound was down 0.2 percent at 85.555 pence, off Monday's one-week high of 85.30.

Most analysts say the pound is gaining on signs the Conservative Party is headed for victory on Dec. 12, despite this week's polling data. "The pound has strengthened as a reassuring Tory majority would mean that the risk of hard Brexit is small while avoiding political lock-ups in Parliament and getting a growth-oriented economic policy," Lauri Hälikkä, fixed income and FX strategist at SEB, said in a note sent to clients.

"A Labour victory would certainly give a softer Brexit but also very radical socialist policies, which few believed would be good for the pound." Expectations for a Conservative win, alongside a decline in the threat of a no-deal Brexit, have pushed sterling up almost 8% since early September.