Sterling dips as investors take profit on 'Rachel rally'

By Amanda Cooper

LONDON, Dec 1 (Reuters) - The pound edged lower on Monday, as investors took some profits on November's modest gains ahead of a widely expected interest rate cut later this month. 

Sterling gained more than 1% last week, marking its largest weekly gain since early August, lifted by a relief rally after finance minister Rachel Reeves' long-awaited budget soothed some concern about Britain's long-term finances.

The pound was last down 0.13% against the dollar at $1.3226, while dropping against the euro, which rose 0.3% to 87.89 pence.

Seasonally, December tends to be a stronger month for sterling. On average, over the last 25 years, December tends to be the second-strongest month of the year for the pound, with a gain of 0.28%, behind top month April, when the pound has, on average gained 1%, according to LSEG data.

Money markets show traders are placing a 90% chance of a cut from the Bank of England later in December that would take the base rate to 3.75%, where they expect it to remain for the coming few months. 

This erodes some of the pound's appeal for overseas investors, but by the end of the year, the UK would still boast some of the highest interest rates within the Group of 10 wealthiest nations, which offers sterling some support.

"The removal of some policy and political uncertainty removes some of the headwinds to the UK pound. It has strengthened a little since Reeves’s speech. But we think it is likely to weaken a little over the coming months — especially against the euro — as policy rates and bond yields come lower," Graham Hook, head of EMEA government relations and public policy, and Benjamin Jones, global head of research at Invesco, said in a note late last week.

Anecdotally, Simon Phillips, managing director of travel currency specialist No1 Currency, said the pound's performance in November had offered a boon to British consumers looking to go abroad, as what he called the "Rachel rally" lifted sterling last month against most of the currencies of popular tourist destinations, such as the Turkish lira and Icelandic crown. 

(Reporting by Amanda Cooper; Editing by Kirsten Donovan)