If we want to be charitable to Nietzsche (and it is always good form to be charitable to philosophers one studies), we could argue that Nietzsche doesn't really believe the racial stereotyping he employs. He writes in earlier chapters about how a great thinker is always "masked" and must rarely reveal his true colors. It seems a great deal of his discussion of race in this chapter is meant to oppose the nationalistic, anti-Semitic Germans who were in power at the time. A critique of the very concept of "race" might have gone right over their heads, but a reversal of their stereotypes, which praises the Jews and disdains the idea of "pure" German stock, might hit them directly where it hurts. Of course, this reading still leaves us wondering why Nietzsche chose to pick on the English. I suppose it's good fun, if nothing else.
This reading of Nietzsche is also supported by his conception of the "good European." Nietzsche was eager to be read as a European writer, and not as a German writer. He lived in Switzerland and Italy, he uses many French terms, and is generally critical of German nationalism. According to Nietzsche, the best among Europeans are able to see beyond the nationalism that their homeland foists upon them. Nietzsche's admiration for Napoleon, for instance, does not come from some "master morality" of conquering and dominating others. Rather, it comes from Napoleon's vision of uniting Europe and bringing all nationalities under a common rule. Nationalism, to Nietzsche, brings just one more set of prejudices that a truly free spirit must move beyond. We see the direct influence of Nietzsche on James Joyce in ##A Portrait of the Artist as a Young Man##: "When the soul is born in this country there are nets flung at it to hold it back from flight. You talk to me of nationality, language, religion. I shall try to fly by those nets." Even Joyce's choice of metaphors is Nietzschean.
A final point worth noting is Nietzsche's disparagement of English thinkers as being obsessed with knowledge. In the previous chapter, he lauds the pursuit of knowledge as the highest possible pursuit. This contrast helps to bring out Nietzsche's use of words to mean opposite things. The "knowledge" of a Darwin or a Spencer is the digging up of facts, devoid of meaning. The "knowledge" of a free spirit is a removal of inhibitions, assumptions, and prejudices that allows one to create meaning. We must always be careful not to ascribe simply a positive or simply a negative to any words used by Nietzsche.