I have the exact same problem - devices that worked fine are now screwed (eg Netgear ReadyNAS 314) - a lot of these devices simply wont get an update.

Creating the app password worked for password creation. But app/devices still wont authenticate! I am still using SMTP settings from https://support.microsoft.com/en-gb/office/pop-imap-and-smtp-settings-for-outlook-com-d088b986-291d-42b8-9564-9c414e2aa040 but if I use the new app password (or even my normal password) the NAS still fails.

I have even tried removing 2FA from my @outlook.com account but nothing works