UPDATE 1-Sterling brushes off poll showing Conservative lead narrowing

The pound inched higher on Wednesday in very thin trading, shrugging off a key opinion poll for Britain's general election that showed the ruling Conservative Party might still fail to win a majority.

The narrowing of the Conservative's lead just a day before the vote cast some doubt on expectations of a definitive outcome that has boosted sterling in recent weeks. A closely watched model from pollsters YouGov indicated Prime Minister Boris Johnson was on course to win a majority of 28 in parliament at Thursday's election, down from a forecast of 68 last month.

YouGov said that its model could not rule out a hung parliament, where no party gains a majority. Another poll by research company Opinium on Wednesday showed that the Conservatives' lead over Labour narrowed to 12 points - a marginally better forecast than YouGov's.

The pound has rallied in recent months on growing expectations that Johnson's Conservatives would gain an outright majority in parliament, helping them pass a withdrawal agreement with the European Union that was agreed in October. The British currency fell as low as $1.3107 in Asian trading, off a seven-month high of $1.3215 hit on Tuesday. It was last down around 0.1% against the dollar at $1.3144. Against the euro, it was up around 0.1% at 84.225 pence, but still off Monday's 2-1/2 year high of 83.940 pence.

In betting odds data released following the YouGov poll, the odds of a Conservative majority fell to 69% compared to 80% two days earlier, according to betting platform Betfair. Betfair said this compared to an 83% odds for a Conservative majority the day before the 2017 election, after which no party gained a majority in a surprise result. The probability of a hung parliament is also higher - at 29% compared to 14% right before that election - demonstrating the difficulty of predicting the result.

With the market betting on some sort of Conservative majority, a hung parliament outcome could hit sterling hard, pushing it down to $1.26, according to ING analysts. "I think the polling is tricky," said BlackRock's head of fixed income strategy Scott Thiel, citing the emergence of a more multi-party system in Britain, which has traditionally been dominated by two-party politics, as well as the split between Brexit and national policy issues.

"It's very difficult to call the outcome of a political event... so we are going to be concerned about our ability to get this right or wrong," he said. Gains in the event of a Conservative majority are expected to be less pronounced, since this is largely priced in, according to ING's analysts, who expect the pound to rise to $1.35 in the event of a large Conservative majority and $1.33 in the event of a slender majority.

A majority for the main opposition Labour Party - considered unfavorable to markets - could push it down to $1.24, they said.