The tentative dollar rebound from Tuesday was stalled today by an ominous forecast for the economy from Fed Chairman Bernanke during his testimony before Congress. For the majors, the policy official’s remarks led EURUSD to hold a long-term rising trend and rally over 100 points to 1.57. The pound, despite disappointing data of its own, took advantage of the weakened greenback to confirm a triple bottom and rally back to 1.99.

Risk considerations proved to have an influence on the benchmark currency’s direction as well. The yen actually lost ground against the dollar through the early New York session to extend the notable break from yesterday, while the Swiss franc rose nearly 90 points to 1.0070. The high-yielding pairs had the benefit of the risk rebound and weak US currency, sending AUDUSD and NZDUSD back to 0.9150 and 0.79 respectively. Finally, the range bound Canadian dollar pair was able to extend a reversal to around 1.0150.

While technicals and sentiment seem to be firmly set against a significant dollar rebound, scheduled event risk would ultimately trigger the dollar’s downturn Wednesday. Topping fundamental concern for greenback traders was Fed Chairman Ben Bernanke’s prepared testimony before the Joint Economic committee in Washington. Within his remarks, the policy authority altered speculators’ outlook for the health of financial markets and the economy. Weighing in on the ongoing credit crunch, the central banker said the credit market was still under considerable pressure; and that if the Fed had not bailed out Bear Stearns it may have resulted in a “chaotic” reaction. While these were colorful remarks, traders were more concerned with the outlook for economy. While Bernanke was quick to ensure policy officials the second half of 2008 would see positive growth before expansion returned to trend in 2009, he had also offered predictions of negative growth through the first half of this year. Two consecutive quarters of economic contraction would satisfy the loose interpretation of a recession – which the US has not seen since 1990/1991.

After setting the record for the eighth largest rally on record, the stock market was due for a modest correction. The DJIA ended a back-and-forth session down a modest 48.53 points at 12,605.83. Following suit, the tech-heavy Nasdaq Composite slipped 0.19 percent to 1,367.53 and the broad S&P 500 edged 0.06 percent lower to 1,367.53. Though it isn’t clear through today’s price action, the Fed’s dour outlook for the economy may influence price action for some time, especially with NFPs due Friday and earnings session starting in earnest next week.

Despite the official warning of an impending economic recession, investors weren’t interested in parking their capital in the typically safe haven treasuries. The rate on the two-year note surged 31 basis points to 1.895 while the 10-year bond’s rate rose 19 basis points to 3.596.

For Thursday, the scheduled economic docket is relatively light – good conditions for the usual quiet-before-the-storm seen in the lead up to NFPs. Initial jobless claims will offer a last readjustment to payroll expectations and the ISM services gauge will offer fundamental weight to Bernanke’s outlook.

Richard Lee is a Currency Strategist at FXCM.