I'm leaning towards mounting the treatment on the outside of the window's casing also. If you've got about 5-6" between the bottom of the crown moulding and the top edge of the window casing, then you should have plenty of space to hang a treatment with that size pattern repeat that doesn't compromise the integrity of the pattern or take away from your view. The soft look of a valance would look beautiful there. We have a window in our dining room that is about the width of your kitchen window. I did a cornice instead of a valance, but maybe the measurements I have will give you an idea of how it might work for you. There is only about 3-4" between the crown moulding here and the top of the window casing (the cornice "sits" on top of the casing and is only millimeters from the bottom edge of the moulding). Here's a pic to give you an idea: Your kitchen is going to be lovely. I love that fabric!

Break this down into two steps to make it easier. Tackle function first. Don't worry about a valance until after you live with the shade for a while. Get dressed and go to the stores and play with their displays. Find one that give you privacy, but also works with your fan. The valance is just fluff and you might decide that with your clean lines that you don't want one. The pleated shades that Daisy mentioned sounds just like what you need. Even a nice tailored pulldown sounds great with your Shaker-style furniture.

My first thought from looking at the pictures was to paint the window surround white, because your kitchen and dining set are already so dark. I would put cream colored shades that match your kitchen countertop to keep the look neutral. Window coverings are not what you should first notice when you walk into a room; they are more of a neutral background for everything else in the room. A room can look too chopped up when the eye is drawn to the window coverings.

I like the yellow you have, but your artwork has more blues in it. If you're keeping the rug maybe pull a blue or teal from that to inspire paint color. As for window treatments I'd do sheer light curtains, nothing too heavy since you already have heavier furniture and you don't want to take away from the beautiful molding and wainscoting.