Help me settle a capital city

[Hrothbern]

I'd also go with something like this. The western island is not THAT rugged, in particular the northern part around that narrow bay stretching DEEP into the continent has a lot of good flat land.

I would put the X further north at one of the narrows, where it can better control sea traffic passing. The whole layout of these "islands" is such that there should be a LOT of sailing involved. That would render most of the interior of these lands fairly uninteresting, EXCEPT for this huge, narrow bay + rivers effectively opening the entire western continent up to sailing. I'd consider that a strategic advantage. The capital sits at the entrance to this huge system of potential internal waterways. It's faster and a damn sight easier to move along this than to sail around things.

Yes
The bold cross is nice for 10,000-3,000 BC with silt and yearly floods everything for primitive, older ancient cultures.
But as you say for going up North: after that and certainly around 2,000 BC (consider for example the Minoan culture), controlling that inner sea with a seaport Capital offers huge benefits lasting at least to 1,000 AD, enough for a head start in trading (like the Vikings, Arabs etc).
Around 1,500 AD peat for Energy & Urbanisation (around the small lake North of the bold cross ? but perhaps also up North ?) and oak forests for bigger ships (again the river an advantage) become important. Watermills a bit thin up North for early mass production manufacturing. That should be ok for a big colonial trading empire amassing knowledge for Techs and Civs with a big metropole Capital for critical mass.
Around 1800 nearby Coal and Iron become important, around 1900 just Coal/Iron somewhere attached to the railway logistics.