(Adds new poll, updates prices, comments)
By Ritvik Carvalho
LONDON, May 30 (Reuters) - Sterling rose against the dollar on Tuesday as investors shrugged off opinion polls showing British Prime Minister Theresa May’s lead over the Labour opposition narrowing less than two weeks before a general election.
Polls last week showed the Labour Party catching up with May’s Conservatives, shaving off almost half of the pound’s 4 percent gain since the election announcement as investors pulled back some bets that May would win by a landslide majority.
But the belief May would win the election largely remained intact among investors as polls - while confirming the narrowing trend - still showed the Conservatives with a sizeable lead.
Minutes after an ICM poll showed May’s Conservatives Party’s lead narrowing to 12 points from 14 points last week, sterling rose nearly half a percent on the day to touch $1.2888 - its highest level since Friday.
“It (the pound) has bounced back up today and I think it’s because maybe reality has set in to some extent,” said Christopher Beauchamp, analyst at IG Markets.
“On the basis of current polling maybe they (the Conservatives) aren’t going to wipe the floor ... but they are still going to win - and so people are saying maybe the fall is overdone.”
In a televised debate on Monday, May said she would walk away from divorce talks with the European Union without a deal if she had to, but Labour leader Jeremy Corbyn said he would make sure an agreement was reached if he won power.
Kathleen Brooks, research director at City Index, said markets could begin pricing in the prospect of a Labour victory if the polls were to narrow further, although that would not lead to an “outright collapse” in sterling given Labour’s stance towards Brexit.
Speculators continued to wind down record high bets against the pound in the week up to last Tuesday, data showed last week, reflecting a turn in sentiment on the British currency since May called the snap election mid-April.
But one week risk-reversals - which capture the date of the June 8 election - on sterling-dollar showed their highest bias towards weakness since April 10 on Tuesday, suggesting investors were again turning negative on the currency.
Risk reversals are a gauge of the balance in the market between options betting on a currency rising or falling.
“A market-friendly UK election outcome already appears priced and the risks are now skewed to a disappointment,” strategists at Deutsche Bank wrote in a note to clients.
“Sterling positioning is much lighter, the evidence for a consumer-led slowdown continues to build, and the Bank of England is likely to stay firmly on hold through the remainder of the year. All this leaves inflows into the UK highly vulnerable to a rapid slowdown. We like selling sterling both against the euro and Swiss franc.”
The pound was 0.1 percent lower at 86.97 pence per euro.
Reporting by Ritvik Carvalho; Editing by Nigel Stephenson and Tom Heneghan