Assuming you are keeping the blinds....make or have made an upholstered valance the width of the inset but only about 6" high. Behind it, you can use an inexpensive rod to hang stationary panels on each end. This will soften the look of the window.

I would mount a valance at the ceiling line outside of the nook with some side panels. This will help create a space where you could have a sofa, bench, or dressing table.