LONDON, Dec 12 ― The pound inched higher yesterday 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 per cent at US$1.3180 (RM5.4891), not far from the eight-month high above US$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 today, 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 yesterday 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 favourite short,” said Geoffrey Yu, head of the UK investment office at UBS Wealth Management.

Leveraged funds held US$2.44 billion in net short positions on the pound in the week to December 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 per cent from 80 per cent two days earlier, according to betting platform Betfair.

Betfair said this compared to an 83 per cent 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 round ― 29 per cent rather than 14 per cent 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 US$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 US$1.35 if there's a large Conservative majority and US$1.33 if they have only a slender majority.

A majority for the main opposition Labour Party ― considered unfavourable to markets ― could push sterling down to US$1.24, ING analysts said. ― Reuters