It'd look much better if you do the penny tile first. They're a little tough to cut straight, and have a tendency to fall off the sheet if you cut them on a wet saw. Installing them first means you don't have to be as precise with your cutting, because the side pieces will hide the cuts, thereby giving you a much cleaner look.

now-- I hope you've waterproofed this niche, and about 6" out onto the wall all around it??

Thank you for the info on setting the tile! I've seen some advice to use Redguard. Is that what you would suggest?

Either that or Hydroban.