I understand your situation and can see why you feel uncomfortable about the observation.
The thing to remember is that you are not being tested in this new setting. You have already been hired as a teacher and continue to work in the school. So it would be more helpful and reassuring for you if you saw the observation as part of the learning process. The objective is different to the graded observations on your certificate course.
I don’t think it’s a good idea to refuse this observation for two reasons: for you from a learning point of view and for how you are perceived in the school. It is after all a part of the school’s policy.
You could talk to colleagues about their experience of being observed in the school to see how they felt about it, how the observation was conducted, and how they approached it.
Talk to the observer in advance and if you have a good relationship with this person, let him or her know that you’re feeling nervous. Most people understand how difficult it is to be observed and this alone could make the situation more bearable for you.
Think about how you would like to develop as a teacher and use this as a focus for the observation. If the observer sees you being positive and using the observation as an opportunity to learn, then he or she is likely to be more positive too.