the Doctor was mocking the sycorax leader, which urged him to fight the Doctor
That answers 1. The answer to 2 is probably that, as Rose said, the Doctor is part of the circuit and he specifically didn't want the humans to understand. He chose to speak the Sycorax language himself so that there would not be any translation. This and the leader's reaction both suggest that whatever he said was very, very rude indeed.
When someone speaks in their native language, the TARDIS translates it so that a person that doesn't speak that language can understand. If someone speaks in a language that isn't native to the speaker, like for a memorized quote or phrase, the listener would hear it as the speaker said it. So, if the Doctor talks to their leader in Sycorax, the Sycorax leader would hear it for what he said it, but the others would hear it for what he said to.