Markets navigated a turbulent week as the collision of geopolitical uncertainty and shifting monetary policy expectations drove dramatic moves across asset classes, with Australian inflation data adding further fuel to an already volatile mix.

Gold emerged as the standout performer, surging to fresh all-time highs as investors sought refuge from escalating US-European tensions over Greenland. The precious metal climbed more than 6% over the week, with silver posting even more spectacular gains of nearly 15% by Friday. The rally reflects growing unease about the durability of transatlantic relationships and questions over the reliability of traditional safe-haven assets denominated in US dollars.

President Trump's declaration that America "needs to have Greenland" and threats of 200% tariffs on French wine initially rattled equity markets, with the Nasdaq falling 1.7% and the S&P 500 dropping 1.3% mid-week. However, markets partially recovered after Trump indicated he would not use military force, with equities bouncing back as investors returned to the familiar "taco trade" playbook, betting that provocative rhetoric would ultimately give way to negotiated compromises.

The US dollar told a more decisive story, falling to four-month lows around 97 on the DXY index, down 1.2% year-to-date. The weakness accelerated late in the week amid speculation of coordinated intervention between Japanese authorities and the Federal Reserve to support the yen.

The Australian dollar was a particular beneficiary, surging to 70 US cents—its highest level since early 2023—after Wednesday's inflation data delivered a hawkish surprise. Headline CPI jumped to 3.8% for the year to December, well above the 3.5% consensus and up sharply from 3.4% in November. The trimmed mean measure edged higher to 3.3%, confirming that underlying price pressures remain stubbornly elevated.

The inflation result compounds the challenge facing the Reserve Bank ahead of next week's meeting. Housing costs, the unwinding of government electricity rebates, and sticky services inflation drove the upside surprise, precisely the domestic price pressures the RBA had hoped would moderate. Markets responded by pricing rate hike odds above 70% for February, with some economists now pencilling in back-to-back increases.

Australian 10-year bond yields pushed toward 4.9% as investors positioned for RBA tightening, a stark contrast to the global trend of central bank easing. The combination of a tight labour market, unemployment fell to 4.1% in December versus expectations of 4.3% and persistent inflation leaves the Board with little room to delay action.

Japan's bond market experienced its own drama earlier in the week, with 40-year yields spiking to a record 4.23% amid concerns about Prime Minister Takechi's proposed fiscal expansion, prompting comparisons to the UK's "Liz Truss moment." While yields subsequently retraced, the episode highlighted fragile sentiment toward highly indebted sovereigns.

Oil remained conspicuously subdued despite geopolitical turbulence, with Brent crude hovering around $64-65 per barrel. The International Energy Agency's assessment of persistent oversupply continues to cap prices.

Looking ahead, attention turns to next week's RBA decision, where the central bank faces the uncomfortable reality that inflation is drifting up rather than down into 2026. For Australian households already stretched by elevated borrowing costs, the prospect of further tightening adds another layer of uncertainty to an already anxious start to the year.