UPDATE 2-Sterling brushes off poll showing narrower Conservative lead

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

The narrowing of the Conservative's lead just a day before the vote has cast some doubt on the expectations of a definitive outcome that have boosted sterling in recent weeks. The British currency was last up 0.2% at $1.3180, not far from the eight-month high above $1.32 it hit on Tuesday. Against the euro, it rose by the same amount to 84.15 pence but remained below Monday's 2-1/2 year high of 83.94.

A closely watched model from pollsters YouGov put Prime Minister Boris Johnson on course to win a majority of 28 in parliament on Thursday, down from a forecast of 68 last month. YouGov also said its model could not rule out a hung parliament, where no party gains a majority. A poll by research company Opinium on Wednesday said the Conservatives' lead over Labour had narrowed to 12 points - a marginally better forecast than YouGov's.

The pound has rallied in recent months on growing expectations the Conservatives would gain an outright majority, helping them pass a withdrawal deal with the European Union that was agreed in October - and ending 3-1/2-years of uncertainty. "Less Brexit uncertainty in itself can deliver a wide enough gap between growth expectations in the UK and its major partners such that sterling is not going to be a favorite short," said Geoffrey Yu, head of the UK investment office at UBS Wealth Management.

Leveraged funds held $2.44 billion in net short positions on the pound in the week to Dec. 3, CFTC data showed, and analysts said there is still room for those positions betting on a fall in sterling to be unwound, which could drive the pound higher. In betting odds data released following the YouGov poll, the chance of a Conservative majority fell to 69% from 80% two days earlier, according to betting platform Betfair.

Betfair said this compared to an 83% chance of a Conservative majority the day before the election in 2017 when no party won a majority in a surprise result. The probability of a hung parliament is also higher this time around - 29% rather than 14% right before the 2017 election - demonstrating the difficulty of predicting the result.

With the market betting on some sort of Conservative majority, a hung parliament could hit sterling hard, pushing it down to $1.26, according to ING analysts. Gains in the event of a Conservative majority are expected to be less pronounced, since this outcome has largely been priced in, according to ING analysts. They expect the pound to rise to $1.35 if there's a large Conservative majority and $1.33 if they have only a slender majority.

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

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