I know I have been saying use an app password. I cannot explain it but my wife's iphone started doing this after she had to change her password. She has 2FA enabled so we tried entering a app password. App passwords did work with her account as we have them documented in her password manager. No go. Got a new app password and that didn't work.
She said can she try her regular password in the iOS mail app. We had nothing to lose so I said try it.
It worked. Made no sense at all. She keyed in password, it challenged her with send a code to an email address, she entered the code and it work. No more messages.
May I suggest, just as a test. Enter your outlook mail account using a browser. Manage your Microsoft account and disable 2FA. Once disable try your regular password in iOS mail.
If it works, go back and enable 2FA. I would try 2FA with an email account (rather than texting or authenticator app). I would think iOS mail will challenge you again. Enter your normal password and hopefully it will challenge you by emailing a code.
Just for the record, wife's phone is 14 Pro running 17.1.1.