I always have to enter my password - usually twice.
I don't know exactly how I got to where I am in iTunes - but I have the option to setup my iPod as new or to restore from a previous backup. It lists my backups. I chose the most recent one. Then selected Continue. Enter the password to open your iPod backup comes up. When I enter it it says iTunes could not restore my iPod touch because the password is incorrect.
On my iPod I see Hello, then slide the arrow to open setup. It asks me to choose my network, the location services, then I have choices to 1. Setup as new ipod touch 2. Restore from iCloud backup 3. Restore from iTunes backup. I chose the last one. Now my screen just shows Connect to iTunes and has a pic of a cable pointing to iTunes icon.