The issue was resolved by removing all minecraft files as follows:
move all files in AppData\Roaming\.minecraft to another folder (OLD)
start the launcher with a blank slate, connect and install the game
connect to a server to confirm it works
However, removing all the new files and restoring all the files from the OLD folder did not bring back the issue as one would suspect, as I tried to pinpoint which file exactly was at cause. This indicates a problem with the launcher OR the Microsoft account unable to sync properly and not the game install. However as I was trying to dig deeper into the cause the community support was mostly annoyed that one would try to find the cause after the issue was "fixed".
Once the issue is "fixed", you can restore all your old files, everything should work as it did before the migration.
As clearly stated in the description:
You have disabled online chat in your Xbox Privacy settings. Go there and ensure that "You can communicate outside of Xbox Live with voice & text" is enabled.
You have hidden Chat in your chat settings, or disabled all chat except for commands. To fix this, go to "Options → Chat Settings → Chat" and set it to "Shown".
those settings are already as they should be, this is clearly not the issue here.
And just to hammer the point across: see attachments for current settings used.
d Benj gets it, my best guess is a failure to Sync the account, either from the Launcher side or from Microsoft's side, but of course nobody is willing to dig deeper into that, it's easier to tell people to delete everything and force a Sync with a fresh installer than try and work out the issue I guess.