The choice between ranger and priest is quite a hard one. If you want to fnd all the nice tems in the game then go for the ranger, but if you want a healer (although later you can get an instrument which casts heal all) and later a very powerful offensive caster possibly (see another thread for discussion about the priests potential) then the priest is for you. I myself would use both of them, one of them instead of the valkyrie (since her spellbook also overlaps with that of the priest), since you can pick up one of them in Arnika if you want to. But feel free to do whichever you like.
The party composition seems quite good to me, the rogue and the fighter are the best meleers in the game, the bard can get to, be powerful in close combat also, and you an find some cool instruments for him later on. The psionic is also a powerful spellcaster, though towards the end of game, you run into too many high resistance monsters, so will probably need powercast above 60 to be effective. The ranger is the best in ranged combat and searches for hidden items, while the priest just keeps your party alive. I think it is quite a good party, and I don't think it should have problems during the game.
For races I would choose, though some here might disagree:
Lizardman Fighter
Hobbit Rogue
I don't know what to take for a valk, since I've only played vi as a valk, but probably human or drakon
Female Hobbit Bard (for lockets of reflection and other only female items)
Elf Psionic
Elf Ranger / Dwarf/Elf Priest
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