England(yes, all of it)

The setting where the Novel may not begin, but where a great bulk of it takes place.  Both Gwendolen Harleth and Daniel Deronda were born here and grew up here, get married here and this is where their loved ones die in the case of Daniel Deronda and Mirah's brother/Deronda's mentor Mordecai.  In Gwendolen's case, she might be better off without Grandcourt, but he's an important supporting role and he still dies in England.  Another point of contrast - Gwendolen starts the novel having fled to Germany whereas Deronda isn't running from anything, and the story ends with him and Mirah preparing to leave for Israel and their new life together while Gwendolen remains behind.

Additionally, Britain actually has a longwithstanding problem with antisemitism.  Victorian society, heavily Christianized(at this point, mostly Anglican-Protestant with some roman catholics in the mix), in particular was very distainful if not outright hostile towards their jewish peers.  This attitude is probably a lot of what made Daniel Deronda so controversial, though its somawhat Zionist leanings(ie, the idea that Jewish people belong in Israel and should repatriate themselves enmasse) might have something to do with what's kept it controversial, though Antisemitism is far from dead, unfortunately.

“Daniel Deronda.” Encyclopædia Britannica, Encyclopædia Britannica, Inc., www.britannica.com/topic/Daniel-Deronda.