That image looks like Terminal, and not Powershell. Did you change some setting to launch Terminal instead of Powershell.exe? Can you just run Powershell?
Settings: illegal characters in path"
Assuming that error is referring to the system path environment variable, run this statement in pwsh and look for non-ascii characters in folder names.
($env:path).split(";") | sort-object
If you don't find anything, run process monitor and trace it.
https://learn.microsoft.com/en-us/sysinternals/downloads/procmon
Add a filter to trace powershell and windowsterminal.
Recreate the error and find where Terminal launches Powershell. Look at the command line that Powershell was launched with.
Look at the files that Powershell tries to read and look for strange characters.